MBL Myths That Hurt Small Businesses

August 16, 2013 at 7:56 am 2 comments

imagesHow bad are things out there for the small business owner looking for a loan?  Improving, but still bad.  What’s more, things aren’t going to get much better any time soon.

Don’t take my word for it.  According to an excellent analysis released by researchers at the Federal Reserve Bank of Cleveland yesterday, recent declines in small business lending not only reflect the continued impact of the Great Recession, but “also. . . longer-term trends in financial markets.  Banks have been exiting the small business loan market for over a decade.  This realignment has led to a decline in the share of small business loans in banks’ portfolios.”  According to the researchers, the fraction of small business loans of $1 million or less in banks’ portfolios has dropped from 51% in 1998 to 29% today.

What do they think is behind this systemic decline?  First, consolidation has reduced the number of small banks but more provocatively, they suggest that increased competition in the banking sector has made banks concentrate on attracting bigger, more profitable loans at the expense of small business loans.  To steal a line from investment banking, it takes just as much time to put together a small deal as a big one.

Whenever credit unions put on a serious press for increasing the MBL cap, they are inevitably confronted with the testimony of an earnest mid-Western community banker whose family has sponsored the local Little League team in Pleasantville for the last five generations.  He explains to Congressmen that he would love to offer more small business loans, but that small businesses simply aren’t asking for them.  The MBL cap, he argues, won’t increase the number of business loans but simply add to the competitive pressures of God-fearing, tax-paying community bankers, who, by the way, are represented by one of the most politically connected lobbying groups in DC.

According to the researchers, the community bankers have the story half right.  There has been a decline in demand for small business loans as a result of a dramatic decrease in the number of small businesses.  The Great Recession did a number on the small entrepreneur.  However, even allowing for this fact, the researchers argue “lenders see small businesses as less attractive and more risky borrowers than they used to be.  Fewer small business owners have the cash flow, credit scores, or collateral that lenders are looking for.”

Now I am not trying to give banks a tough time for cutting back on small business lending.  A lot of this simply reflects basic economic reality.  But this is precisely why Congress should allow credit unions to make MBL loans free of the fear of running up against an arbitrary cap.  Small businesses specifically, and the American economy writ large, need a larger pool of potential lenders.  MBL reform is a simple, cost-effective way of achieving this goal.

On that note, have a great weekend.  I am sure you are all excited that the English Premier League is starting up again.  Seriously, you should give it a shot, contrary to popular belief soccer isn’t boring, it just looks that way.

Entry filed under: Advocacy, Economy. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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