Maximum Capacity

Another source of capital, the Federal Home Loan Bank, has loosened its rules, says Wall. The Federal Home Loan Bank originally helped increase American home ownership by giving banks funds in exchange for pledged home loans. Now, with a larger client base that includes commercial banks, the Federal Home Loan Bank will accept a wider variety of collateral, including commercial real estate and business loans. “Banks used to need the money on deposit in order to make a loan; now they can get money from the Federal Home Loan Bank,” Wall says.

Some banks borrow money from the Federal Reserve. It can be risky to borrow floating-rate Fed funds and use the money to finance fixed-rate debt, Flesvig says, because a bank could find itself paying more for the money it loans out than it receives back in interest if rates rise. “You could end up with a big interest-rate margin issue,” he says. Even so, the cost of Federal Reserve funds is low enough to tempt some banks to use the Fed as a funding source for at least a few of their loans.

Banks get money in other ways, too. Brokered CDs are one way to increase deposits. Some banks, disappointed by the performance of their stock market investments, have moved money from stocks into loans, says Brian Carnes, vice president of Premier Bank in Maplewood. Some banks also form relationships with bigger banks, allowing them to pass on some of their debt to the larger institutions.

There are other ways to keep money on the books, too. Better technology has lowered banks’ cost of doing business, so they can more aggressively court customers. Credit bureaus are faster and more accurate, Wall says, giving banks more information about their customers and cutting down on the number of bad loans.

A Good Time for Borrowers

Even with a healthy economy and expanding businesses, the supply of loan money in the state probably outstrips demand for it, notes Dave Thompson, Minneapolis-based regional director of commercial banking at Associated Bank, N.A., which has its headquarters in Green Bay, Wisconsin. As a result, banks are aggressively courting customers, and that’s made it cheaper and easier to get business loans.

“Banks are loosening their lending criteria, lowering interest rates, and lowering fees,” Thompson says. A borrowing company with a BB credit rating (a ranking of creditworthiness on a scale from the highest rating of AAA, to D for borrowers that have defaulted on payments) and annual sales of $250 million may have paid LIBOR (or London Inter-Bank Offered Rate, a common interest rate benchmark) plus two percent for a business loan last year, Thompson says. This year, the same company might pay LIBOR plus 1.25 percent.