Bankers Played a Huge Role in Stabilizing Wisconsin’s Economy

It has almost become cliché to say that this past year was unprecedented. No one obviously predicted the arrival of the COVID-19 pandemic, and no one correctly predicted the breadth or length of its impact. The ramifications of this health crisis on our economy were great this past year, and I expect this to unfortunately linger well into 2021.

Bankers are always focused on helping their customers, but throughout last year staff were stretched very thin to accomplish the workload while balancing their own COVID-related challenges. The persistent low interest rate environment we experienced at the beginning of last year meant mortgage lenders and operational staff were already very busy. As low interest rates continued throughout the year, there was no substantial decrease in demand. Add to that the Paycheck Protection Program (PPP) and it quickly became clear that bankers were on the economic frontlines of this crisis. Indeed, net loans and leases grew by over 10% from the prior year through the third quarter, with commercial loans growing by over 41%.

In the two rounds of PPP stimulus this past year, Wisconsin bankers across the state proactively engaged to help their customers by providing nearly $10 billion in funding to almost 90,000 businesses. The volume of loans made in this four-month span of time exceeded what most banks do in one year’s time. At the time of this writing, a third round of new PPP stimulus has not yet passed, and if legislation does not pass during the lame duck session it is expected to pass early in the 117th Congress. Since helping their customers and communities is in the DNA of bankers, the industry will once again step up to help those businesses in need by participating in this next round of PPP.

It is clear that the stimulus money provided this past year was critically needed by businesses and individuals to help get them through the shutdowns and related challenges of the pandemic. The unique lens that gives bankers insight to all sectors of the economy allowed them to act quickly to defer loans to help their customers financially weather what we thought was a short-term health crisis. Most of these same customers received PPP and other stimulus money to help them keep employees paid and their businesses open. With the money running out and the health crisis continuing, it is causing undue financial stress on certain business sectors that will have long-term implications for some while others will have no choice but to shut down. We started to see this happening in the fourth quarter of last year.

As a result, bankers were already preparing last year in anticipation of a higher than normal number of loan defaults. The third quarter FDIC data shows that Wisconsin banks increased their allocation to loan loss reserve accounts by 31% year over year. As the stimulus money starts to run out causing businesses and individuals to have more difficulty paying their loans, the third quarter also saw noncurrent loans and leases increase by 23% year over year. In the first six months of 2021, I expect there will continue to be higher than normal loan defaults which will cause strain on bank’s balance sheets, particularly if a bank did not put enough money into its reserve allocation.

Strain did start to appear last year, however, in the margin of profitability of banks where Wisconsin banks’ net interest margin only grew by 3.27% through the third quarter of 2020 compared to 3.51% in third quarter 2019. Despite the roller coaster ride we experienced across the business sector last year, Wisconsin banks continued to be financially stable and profitable through the third quarter of 2020. I expect the industry will end the year strong as well. Moving into the new year, banks will retain strong balance sheets and profitability, although it will continue to be measured until the health crisis recedes.

Interested in what 2021 holds for Wisconsin's economy? Join us virtually on January 7 for the Midwest Economic Forecast Forum with guest speaker Chicago Fed President Charles. Evans. Click here for more information.

By, Alex Paniagua