Credit crunch coming? Featured

8:00pm EDT March 26, 2008

Awidely anticipated result of the nationwide mortgage-related credit crunch is the tightening of bank credit standards across the board. While the Federal Reserve has been working to increase the money supply and ensure its availability, speculation persists that money will become harder to get in the form of bank financing. Will the national credit crunch — primarily on the consumer side right now — carry over to Pennsylvania and put a squeeze on commercial funding, as well?

“Not necessarily,” says Nicholas A. Garrubba, senior vice president and chief operating officer of Brentwood Bank. “There are a number of factors that indicate we may not be going down that road here in western Pennsylvania — at least not anytime soon and not at the community-bank level.”

Smart Business spoke with Garrubba about what businesses should expect to see and where they may be able to turn in their efforts to obtain funding in the near future.

What dynamics make Pennsylvania different from what’s going on across the country?

In Pennsylvania and the Mid-Atlantic region in general, we’ve historically been much more conservative in our approach to lending. That’s been especially true within the community-banking sector. The upside is that community banks are a stabilizing force in the banking industry right now and are a big reason why we’re not seeing more regional fallout from mortgage loan defaults.

The irony is that there may be less likelihood you’ll get caught in an institutional credit ‘squeeze’ with a community bank because, for the most part, community banks have a relatively conservative approach to credit quality. Equally, if not more, important, lenders at the community-bank level seem to have a better grasp of the difference between a credit ‘risk’ and a business or individual with unique needs or circumstances. Many larger financial institutions seem to be challenged when making this distinction.

What happens to these businesses as credit standards continue to tighten?

We are already starting to see more and more ‘good credit’ risks getting caught in the institutional credit squeeze. This appears to be happening with business customers who have been served by larger national or regional lenders in the past and who have discovered there is no continuity of relationship. Instead, it’s become a ‘revolving door’ with a new bank officer handling each successive funding request. What compounds the problem is business customers aren’t dealing with a decision-maker, they’re dealing with a messenger. The decisions are being made somewhere else, by someone who has no knowledge of or interest in the relationship or the customers’ business circumstances. When credit standards tighten and a business has something out of the ordinary that is unique to that business, it becomes an easy target — these are the first ones singled out.

What’s the alternative for these businesses?

There are a couple of reasons why community banks are in a better position to serve the needs of borrowers with good credit and, particularly, smaller to midsized businesses in need of commercial financing. First, community banks aren’t the ones who have to tighten credit standards.

Second, a community bank can maintain a deeper relationship with its commercial customers. It can provide direct, one-to-one contact with decision-makers. It can be more ‘in touch’ with its business customers’ circumstances. And today, it can anticipate their ongoing growth needs and take care of them with a complete range of product and service offerings — some of which have only become available within the last three to five years.

Businesses and commercial loan customers with unique needs or circumstances — those who are often the first ones caught in a credit ‘squeeze’ — will find it’s much easier to obtain custom-tailored loan terms and other relationship benefits when they seek out financing from the community banking sector.

Do community banks have money readily available to lend?

Yes, absolutely. Many community banks have the on-site resources and expertise to support multimillion-dollar lending capabilities — and have the dollar capacities to do those kinds of deals. Different institutions have different lending ‘comfort zones’ with regards to the amount of risk they are willing to tie up in one credit. But, as a rule, lenders all have the same responsibility — to put good quality loans on the books.

What’s the rule of thumb that potential commercial borrowers should follow when approaching a bank for funding?

Don’t assume you need to go through a big bank if you need a big loan. If you have unique needs, you’re going to be a lot better off working directly with decision-makers who have multimillion-dollar lending knowhow and who are able to get to know you and your business. As credit standards tighten, the value of the relationship will take on greater importance — and as it does, you’ll find the community banker has more and more to offer.

NICHOLAS A. GARRUBBA is the senior vice president and chief operating officer of Brentwood Bank in Bethel Park, Pa. Reach him at (412) 409-9000 or