Joseph Witt, center, the president of the Minnesota Bankers Association, was the speaker for the June 9 meeting of the Staples Rotary Club. He described current issues facing the banking industry. Rotary President Jerel Nelsen is at left, with Dick Donat, right,, in charge of that day’s program. (Staples World photo by Tom Crawford) The head of the Minnesota Bankers Association last week told a Staples audience he wanted to clear up two current misconceptions about banks and the banking industry.

Speaking at a Wednesday noon meeting of the Staples Rotary Club at T Maxwell’s, Joseph Witt said it is not true that banks have benefitted from a bank bailout and that banks do not want to lend money in today’s economy.

Federal bailout money went to non-bank enterprises, Witt said, such as the insurance company ALG, the finance company GMAC and the Freddie Mac and Fannie Mae, two government sponsored securities trading firms, all of which were lumped under the heading of “Too big to Fail.”

Witt, the head of a 430 member state banking group, was invited to speak to an audience that included representatives from three banking institutions in Staples and other community members in addition to Rotary members. He said a bank is best defined as a financial institution whose deposits are eligible to be insured by the Federal Deposit Insurance Corporation (FDIC).

“We saw a lot of bank bashing,” Witt said, following the federal government stepping in to aid ALG and the government-sponsored entities. “The federal government stepped in and infused billions to ensure they did not default on their securities,” he said.

He said that in addition, when the U.S. Treasury on Dec. 24, 2009, lifted a $250 billion cap on loans it will make, the government in fact created a huge bailout directly to the Fannie Mae and Freddie Mac agencies.

In contrast, under the federal Capital Purchase Program, the federal government is in line to make a $19 billion profit on loans made to actual banks.

His second point was that banks today are willing to make loans. The chief way banks have to make a profit is to turn their deposits into loans, he said. “Our deposits are liabilities. We owe that money to our depositors. We have to turn that liability into an asset. To do that, banks have to either make a loan or invest in some type of securities.” In short, he said, “Banks make loans, that’s what we do.”

He admitted that banks are facing additional challenges to loan making. The recession has created a shortage of good loan risks and at the same time has made those good risks reluctant to borrow money. Current quarterly call reports for Minnesota banks show banks have a collective $19 billion in line of credit funds. That is money currently approved for lending but not being drawn upon, he said. “People simply are not borrowing money.”

A second hindrance to making loans is today’s regulatory environment, with a massive amount of paperwork that is only going to get larger when a banking reform bill that is making its way through Congress right now passes in a few weeks. “The problem is not a lack of capital. It’s a lack of borrowers and regulatory restrictions,” Witt said.

Witt said two versions of the bill are currently 1,400 and 1,600 pages long and have provisions that banks are opposing. The bill creates a whole new Consumer Protection Agency, he said. Banks would be subject to new rules and regulations, while others who make loans, such as car dealers and mortgage brokers, are not subject to these provisions.

“The banking associations are working hard to get their points across prior to this bill going into a conference committee,” Witt said. He knows, however, the final version will not be kind to the banking industry.