There’s a problem that’s been plaguing the economy for some time now: Lenders aren’t lending.
Some say not at all, others say there’s still some money out there for the right projects, but there’s no question about it – capital is tight.
A recent story on Boise State Radio described bank regulations as a vicious circle. Banks are not allowed to issue more loans until they have more capital, but they can’t earn capital until they make more loans.
Idaho Congressman Walt Minnick has some suggestions to break the cycle, which he shared with members of my leads group, Treasure Valley BizNet, over all-you-can-eat pizza at Pizza Hut in Boise this week.
First of all, he wants to take a page from President Reagan’s playbook and ease up capital requirements for banks (though some say the Reagan-era deregulation is to blame for the current financial crisis). And second, he wants regulators to stop asking banks to have more capital than regulations require.
His third suggestion didn’t name President Obama’s proposal directly, but he said there’s a case to be made for taking some repaid money from the Troubled Asset Relief Program and making it available to community banks for small business loans.
Finally, Minnick had an interesting pitch for changing how assessors value commercial real estate. He suggested that instead of extrapolating a building’s value from the sale price of the distressed property down the street, assessors should determine a building’s value by looking at what it would cost to build a replacement in today’s construction market.
Because of the highly competitive construction bidding environment, buildings that are a few years old will still be valued at less than what they were when they were built, but the value would be higher than a valuation based on a comparable distressed property. These higher valuations would reflect positively on banks’ strengths.
I questioned him on this idea, pointing out that if a building were to sell today, it would probably sell for a price comparable to the distressed building down the street.
He responded by elaborating on the concept, saying he’d want assessors to start with the building’s replacement value, but then subtract money based on how long (years, in some cases) a building would have to sit on the market before it sold.
He said these days, assessors typically approach valuation from several different angles, and then pick the method that gives a property the lowest price tag. That needs to stop, he said.
I can’t say exactly how the math would work out in his proposed scenario compared to the status quo, but it seems like this idea deserves some consideration.