Obama delivers his first State of the Union speech in January. (Xinhua/ZUMAPress.com)
With the unemployment rate hovering just shy of 10 percent and Washington focused on job creation, President Obama this month called on Congress to approve a plan that would take $30 billion in repaid TARP funds and make it available for small banks to lend to small businesses.
“We’re going to start where most new jobs do – with small businesses,” Obama said at a town-hall event in New Hampshire.
[Economy1]There’s just one problem: there’s little indication that these banks need the money — or that making it available would stimulate lending. Further, experts from both the left and the right express concern that the funds could be lost to waste or mismanagement without ever contributing to the nation’s job rolls.
Small banks, which write more than half the nation’s small business loans, have wanted their own pool of stimulus money for a while, though they shunned TARP because of executive pay restrictions and reporting requirements they claimed would be too onerous. But with outrage building throughout 2009 over the behavior of the nation’s largest financial institutions on everything from failing to execute mortgage modifications to hiking credit-card interest rates and paying top executives outsized bonuses, the small banks saw an opportunity.
Members of the Independent Community Bankers of America, which represents nearly 5,000 community banks, met with the president in December to lobby for a pool of money that came without the strings attached by TARP. The group appeared to get what it wanted with the White House plan, which would allow banks with less than $10 billion in assets to borrow up to 5 percent of their asset base from the Small Business Lending Fund. They could be charged as little as 1 percent in interest if they increased their lending to small businesses by 10 percent.
The problem is, these banks aren’t hurting for funds. “The assumption seems to be that banks lack the capital, but in fact, that’s not the case,” said Bert Ely, owner of Ely & Company, a financial consulting firm. “Smaller banks are well-capitalized and have plenty of liquid funds. The problem is finding credit-worthy borrowers.”
According to the Federal Reserve Board’s Senior Loan Officer Opinion Survey released last month, banks did tighten their small-business lending; banks with total assets of less than $20 billion reported cutting off credit to a greater degree than their larger counterparts. Analysts like Ely say small banks’ greater-than-average exposure to potential commercial real-estate losses could be driving this pullback. However, the Fed survey also cited a decrease in demand for loans, leading some analysts to worry that dangling an unnecessary incentive in front of small banks will tempt them to loosen their lending standards too far and make risky loans.
ICBA president and CEO Camden Fine seemed to back up this assertion, telling The Washington Post just two months ago, “We’ve got plenty of money to lend.” The problem, he told the paper, was a lack of demand from businesses.
Where did all the good borrowers go? Blame two closely related factors for the dearth of credit-worthy small businesses: The length of the recession and the commercial real-estate crash. By now, even business owners who had the foresight to build up their equity during the boom years have burned through that cushion. Those who own real estate have to deal with the fact that this collateral is now worth a whopping 40 percent less than it was in 2007, according to a new report from the Congressional Oversight Panel.
“The intent of the policy is for banks to lower their lending standards, but of course no prudent bank wants to do that,” said Joseph Mason, a professor of finance at Louisiana State University. Mason pointed out that most of the tepid economic growth the country has seen in recent months comes from manufacturing companies replenishing inventory levels, betting on an as-yet-unrealized turnaround. As a result, he said, “A loan to one of these companies is inherently very risky.”
The administration initially indicated it would only make the program funds available to healthy banks, but the ICBA’s leader is already challenging that, calling on the president this month in The Washington Post to allow what he characterizes as “less well-capitalized banks” to participate. Critics counter that this would only mean more taxpayer funds will be irretrievable if any of these banks fail and are placed into receivership by the FDIC, and many are doubtful that Congress — which would be tasked with crafting the small-business fund legislation — will acquiesce to this plea.
Opening the door to all small banks regardless of health is a risky proposition, says Gary Burtless, senior fellow in economic studies at the Brookings Institution. Burtless points out that the health of small banks correlates closely to their local commercial real-estate markets. With economists predicting that commercial real estate still has further to fall, it’s almost certain that more small banks in hard-hit parts of the country will succumb.
What’s more, the very reason small banks are as well capitalized as they are today is that they exercised caution during the go-go years, Burtless adds. These institutions passed up a quick buck in favor of what seemed at the time to be old-fashioned lending and underwriting practices. “What worked for these banks is being cautious,” he said. “Are you going to make that zebra change its stripes?”
LSU’s Mason labels the program as a cynical political move aimed more at assuaging voter anger over big bank bailouts than actually helping small banks lend or small businesses hire. “If these guys are going to go to the polls having done nothing for small banks, they really can’t evade the charge that they were a part of the large bank-centric policy that’s at the heart of this crisis,” he said. The plan is about little more than appearances, he charges. “They’re trying to throw a bone here, not a very economically effective bone, to give the appearance of a balanced policy after the fact.”
Supporters of the small-bank plan say the nation’s regional and community banks are better equipped to handle an influx of small-business loan requests than the Small Business Administration. Although Mary Landrieu (D-La.), chair of the Senate Committee on Small Business and Entrepreneurship, spoke positively of the president’s plan to increase SBA funding in a post-State of the Union release, she pointed out that this aid comes after eight years of cutbacks the SBA sustained during the Bush administration.
But even left-leaning analysts like Dean Baker, co-director of the Center for Economic and Policy Research, are skeptical that the banks would be more efficient distributors of these funds intended for small businesses. “The bank’s goal, of course, isn’t job creation,” he says, expressing concern that the real goal here — reducing a jobs gap some analysts have put as high as 11 million — could be fall by the wayside in pursuit of profits. “What you worry is, can this be gamed?” he said. “I’m not very confident that you could police it.”
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