June 24, 2008

The current problems in the credit markets bring both challenges and opportunities to banks. How lenders offer, underwrite and manage loans is changing. The credit situation is impacting a variety of lending lines -- primarily residential mortgage lending, but also commercial real estate lending and even small-business lending. Some banks continue to face funding challenges, particularly some larger banks that have found that some of their traditional sources are no longer available or are more constrained.

Ann Grochala, ICBAMany community banks, however, still have plenty of liquidity and capital, and they all have ready access to the Federal Home Loan Bank system. Lenders must manage risk more carefully due to deteriorated credit quality and economic conditions, but many banks -- particularly community banks -- see opportunities to increase market share in areas like residential mortgage lending as other institutions exit the business.

Clearly, banks face tougher examinations as examiners look closer at lending and risk management practices. Banks are being asked to get fresh appraisals, improve risk management methods, and increase capital and loan loss reserves.

There will likely be a number of regulatory changes because of the housing credit crisis. Both the Federal Reserve and the Department of Housing and Urban Development have regulatory proposals that would significantly change mortgage disclosures. And Congress also is looking at legislative changes in response to the credit crisis.