Phone Survey: Fiscal Cliff Will Impact Banks and Their Customers

After endless amounts of media coverage on the fiscal cliff, I felt it was time to hear from community bank chief executive officers.  Unlike the pundits on TV, community bankers work with small and medium-sized businesses that are driving economic growth and I thought it would be interesting to get a quick take on the fiscal cliff from the point of a view of community bankers. For instance, which will hurt bank customers the most: cuts in spending or tax increases? What are the chances that Congress and the president will reach a deal to avert the fiscal cliff before Jan. 1? How will the drastic cuts in spending and tax increases impact lending? What are the prospects for economic growth if a deal is reached?

The fiscal cliff refers to the series of automatic spending cuts and tax increases that will reduce the federal deficit by $503 billion in fiscal year 2012 to 2013, unless Congress comes up with a compromise to avoid the automatic cuts and tax increases, according to Council on Foreign Relations, a Washington, D.C.-based think tank. Half of the scheduled cuts would come from the defense budget. Some of the automatic tax increases include a reversal of the George W. Bush tax cuts, which would mean an increase in the top tax rate and higher capital gains and dividend taxes. Payroll taxes would also go back to prior year levels. The Congressional Budget Office has projected the automatic “cliff” could reduce the nation’s gross domestic product by 2.9 percent in the first six months, meaning unemployment would rise and the economy would likely fall into a double-dip recession, according to the nonpartisan Economic Policy Institute.

We conducted a phone poll Dec. 7 to Dec. 13 and got responses from 58 bank CEOs.

In our phone poll, CEOs expressed pessimism on the prospect of reaching a compromise before the deadline for automatic tax increases and spending cuts. Fifty-five percent of CEOs said they did not believe that Congress and the president would get a deal in place before the deadline.

Unsurprisingly, 66 percent of all CEOs thought the tax increases would be more detrimental to their customers than the spending cuts. Eighteen percent thought cuts would affect their customers more than tax increases.

On a happier note, if the fiscal cliff is averted and a compromise deal is reached with some tax increases and spending cuts, 57 percent of bank CEOs expected to see some economic growth while only 29 percent thought the economy would be stagnant with little growth.

While 67 percent of all bankers surveyed said they did not believe that “going off” the fiscal cliff would affect their lending activity, 31 percent said they thought the failure to reach a compromise would cause their bank to be less likely to lend.

Hopefully before the ball drops in Times Square, the folks in Washington won’t let the ball drop on the economy.