|September 9, 2011 - Small-business lending key to job creation|
Small-business lending key to job creation
Small businesses were responsible for creating more than 60 percent of all net new jobs in the United States during the last 15 years and provided 55 percent of all jobs in the private sector.But for entrepreneurs looking to start or expand a business, one of the most important things they need is financing. Unfortunately, banks aren’t fulfilling their obligations to assist the economic recovery. Therefore, small business transactions, expansions and investment aren’t occurring.
A Federal Reserve study conducted in July found that only 7.8 percent of loan officers from more than 70 banks surveyed said they’ve made it easier for small businesses to get commercial and industrial loans. In stark contrast, almost 22 percent of those same loan officers said they’ve loosened lending standards for larger firms.
Bankers and bank regulators agree that higher levels of capital are safer for the banking system during hard economic times. But when regulators started enforcing new, draconian capital requirements in response to the financial crisis of 2008, money stopped flowing to small businesses, which hampered their ability to create new jobs.
Specifically, this reduced lending harms commercial real estate (CRE). This has a negative feedback mechanism that drives the value of CRE down and further harms banks’ balance sheets, which also prevents new lending.
To start the flow of money from community banks to small businesses again, bank regulatory authorities should return to enforcing capital requirement standards under the existing Basel Accords.
Nearly 25 years ago, central bankers from the world’s leading economies agreed to set an international standard on minimal capital requirements for banks. One of the definitions of a “well-capitalized” bank under Basel I and II is 10 percent risk-based capital. Unfortunately, bank regulators now ignore that standard and claim that since they define banks as being in a “heightened risk state,” these banks must carry much higher capital ratios.
Under duress, commercial banks did the only thing they could to comply with new regulatory demands for immediate and higher capital ratios — they stopped making new loans and reduced existing ones. This, in turn, dampened the ability of small businesses to expand and hire.
Since capital is nearly impossible to raise in today’s market, there is a significant number of Colorado banks not lending and reducing loans to increase their capital ratios. More often than not, when a bank is reducing loans, it halts new lending and therefore no longer is a reliable source of capital for its community.
From March 2008 to March 2011, more than $2.7 billion — or 27 percent of CRE loans — evaporated from the state. More than $1.4 billion — almost half that amount — came from healthy Colorado banks.
Instead of allowing adjustments for geographic region and business climate or demographics, federal banking regulators have set arbitrary requirements for how much capital a bank must hold regarding CRE loans. Currently, Denver has the same capital/CRE requirements as Detroit, yet these two economies couldn’t be more different.
These onerous and arbitrary regulatory burdens on community banks recently were brought to my attention during a congressional field hearing I held in Greenwood Village in my capacity as chairman of the Subcommittee on Investigations, Oversight and Regulations of the U.S. House Committee on Small Business.
Two local bankers, during formal testimony, expressed serious concerns about the negative effects that these burdensome regulations have on small businesses. This fall, I intend to address these concerns in the Congress, so banks will start lending to small businesses again, allowing them to start hiring once more.
My first course of action will be to offer an amendment to the Communities First Act, legislation I am co-sponsoring that aims to reform regulation for community banks. My amendment would require all federal regulatory banking authorities to adhere to existing bank capital requirements established under the Basel Accords.
Reforming the commercial real estate lending ratio, called CRE 2 (commercial buildings such as offices, apartments, industrial and retail) also will be at the top of my agenda. These requirements should be specific to a region, an economic area, a certain demographic. One size certainly doesn’t fit all. I also may suggest that CRE 1 ratios (land and development) be heightened since this type of lending is more speculative in nature.
I also will work toward amending the mission statement of all the federal banking regulators. Currently, their duty is “to ensure the safety and soundness of the nation’s banking system.” Keeping the interests of our job creators in mind, regulators should be given a dual mandate “to promote credit availability as long as it is provided in a safe and sound manner.”
Federal banking regulators are doing what they think is best to save and bolster the economy. However, their actions have unintended consequences. As a former small business owner, I know firsthand how important financing is to a business’ ability to grow and create jobs, and we must scrutinize what effect every regulation has on our nation’s job creators.
Read more at The Denver Business Journal