Banking Superintendent: Iowa banks probably OK

Tom Gronstal

Although he thinks the United States is clearly in a recession, Iowa’s Banking Superintendent, Tom Gronstal, says there’s no need to for Iowans to hit the economic panic button.

In the near term, he said, it may be harder for all Americans to borrow money as major assets in the economy are liquidated to bailout companies that found themselves mired in trouble largely as a result of connections to the sub-prime debacle.

Gronstal, formerly an executive with his family’s Carroll County State Bank, said Iowa’s 323 state-chartered banks are in solid shape. That’s because banks here have “very little” exposure to the sub-prime mortgage problems — stemming for lenders reaching out to homebuyers with enticing interest rates for properties they ultimately couldn’t afford — which have damaged (and, in some cases, destroyed) financial institutions elsewhere.

“All we can do out here is rejoice in the fact that the events that are taking place will have at most a trickle-down effect,” Gronstal said. “I think for the most part Iowa is going to be unscathed.”

The New York Times reports today that the A.I.G. bailout came just two weeks after the Treasury took over the quasi-government mortgage finance companies Fannie Mae and Freddie Mac, and days after the collapse of Lehman Brothers and the sale of Merrill Lynch.

Amid the current financial crisis, Gronstal has stayed in touch with federal banking regulators and is monitoring the positions of Iowa’s banks.

Iowa banks aren’t permitted to own equity securities, Gronstal said, so community banks around the state wouldn’t have had, for example, Lehman stocks.

What’s more, community banks have more personal interaction with customers, unlike some of the national lending organizations that used the Internet to ink deals with people they never met.

“Most of the community banks develop a relatively long-term relationship with their customers,” Gronstal said.  They therefore aren’t looking to finance homes people can’t afford.

Gronstal admitted that Iowans with investments in 401(k)s and mutual funds aren’t generally liking what they see on the computer screen now, but most will ride out the current storm.  “The value of that today is less than it was a week ago,” Gronstal said. “You don’t have to take a loss. Most of us can afford to wait.”

But this doesn’t mean there won’t be more bad economic news to weather.

Construction of new housing just reached a 17-year low and the crippling of financial giants may over time make it more difficult for Iowans to finance their business and personal endeavors, Gronstal said.

“It will make it harder to borrow money for business and agriculture,” he said.  While he’s optimistic for the long term, Gronstal said a recession is likely if it isn’t already here.

He thinks the world’s central banks understand the gravity of what’s happening with some of the key financial institutions.  “My guess is that they will be able to prevent a depression,” Gronstal said.

He added, “We should feel fortunate where we are. There’s no reason for people to hit the panic button.”