The U.S. financial sector is at the heart of our capitalist system; it is also at the heart of our economic situation.  The Heartland Partnership Excelerate Newsletter this week focused on the financial industry.

This region is known for having conservative practices that is why local financial representatives say we have not been hit as hard as other regions in this economic downturn.  However, we are in no way unaffected by these challenging economic times. 

It has been indicated that this industry will make some changes in practices.  One of those changes will be high quality deals will still have access to capital but moderate and lower quality deals will likely have a tougher time and banks will require more equity in order to get a loan.  You will PROBABLY see new and/or increased fees in banking in general and rate spreads will increase across the board.

We’ve heard many stories about banks shutting their doors.  Keep in mind it is not necessarily that nationally owned institutions are doing so much worse than those regionally or locally owned.  It’s more the region where the institution is located that has an impact on how it fares.
We turned to the experts and economists to learn more about what's happening across the nation and right here in Central Illinois.  What do financial institutions need to do to continue to survive, and what do our regional residents need to know to get through this challenging economic time?

“The Economic Situation:  A National Overview and Local Update”
The financial markets provide a mechanism for those with savings to transfer their liquidity to those with a shortage of savings.  Financial institutions such as bond and stock markets are crucial to promoting economic efficiency.  Dr. Joshua Lewer, a Bradley University economist says "A properly functioning financial system is a primary factor of healthy economic growth, and poorly functioning financial markets are one reason why many countries in the world remain poor. It is not surprising then, that this current economic downturn has its roots in the collapse in the financial markets."
While we have seen significant weakness in the financial sector over the last two or three quarters, there are finally some signs of improvement.  One example is what Dr. Lewer calls the “Ted spread.”  This is the difference between the yield on the 3-month Treasury Bill and the 3-month Libor rate (Libor stands for London inter-bank offered rate and is the inter-bank lending rate).  To Lewer and other economists, this is THE number one indicator of the health of the global credit markets because it is an excellent measure of how fearful banks are when lending.  Under normal credit conditions, the spread should be around 100 basis points (or 1 percent).  It reached record highs of 465 in mid-October ‘08, but now stands at 127 (January 8, 2009).

Unfortunately many economists say we still have a ways to go before the entire financial system fully recovers. Lewer says "look for slow and imbalanced financial improvement in 2009."

National News
The financial industry is under the watchful eye of lawmakers.  According to a recent report by the Associated Press, President-elect Barack Obama's economic team is broadening the mission of the $700 billion bailout for the financial sector, aiming to unfreeze credit for homeowners, consumers, small businesses and local governments.  According to inside sources, Obama's selection for Treasury secretary, Timothy Geithner, is developing a "comprehensive set of investment principles."  The plan has not been finalized, but it is thought it will include measures to mitigate rising foreclosures and will place tougher conditions on financial institutions that receive the money, including limits on executive compensation.

The news service also reports the head of a congressional panel overseeing the $700 billion bailout program encouraged lawmakers to take a very hard look at how banks have used the money.  Our local economists say banks need to use this money wisely.  Dr. Lewer says "The #1 problem with banks and insurers is that they are having problems raising capital and keeping their balance sheets stable.  They must use this infusion of cash to shore up their balance sheets."

Central Illinois
While access to credit has tightened across the country, it is still available in Central Illinois. Local financial industry leaders tell us they saw loan growth in Illinois of nearly 10% in 2008.  In our region, some banks have seen increases around 30% in residential family mortgage loan financing. 
Bank liquidity has affected the amount of money available to lend, but the bottom line is, there is money available. The financial futures markets do not indicate significant interest rate changes in the near future, so consumers should benefit from the reasonable interest rate market that exists right now.

We have seen borrowing rates for business loans rise in the last few months, but they appear to have stabilized.  Dan Daly with Busey Bank says business loan rates are higher because those types of loans utilize more bank capital than others and they are inherently more expensive to banks.  "Because banks are closely managing their capital, business borrowers are going to have to pay rates at higher spreads than typically expected.  However, credit is and should continue to be generally available in central Illinois.  This area’s economy is seen as steady, and banks are more willing to lend into stable economies."  Daly says larger construction projects may be more difficult to finance, but most average risk business borrowers should find money available.

Dr. Lewer offers some advice to the financial industry and to local residents.  He says the lenders needs to continue conservative practices, make prudent loans, use capital being infused into them now and use it wisely, make loans to small businesses because that will stimulate revenue for the bank and for the local communities.   As for regional residents, Dr. Lewer says there is no need to be scared, but there is a need to make wise decisions.  If you have money to spend, spend it wisely.  If you don’t have the money to spend put the credit cards away.