Community Banks & Small Business

Community Banks and small business - both in trouble

On November 30th, 2009, a Congressional hearing was held in Southfield, Michigan (near Detroit) entitled "Improving Responsible Lending to Small Businesses". Over a dozen presentations were made concerning the critical need to increase lending to small businesses, their key role in a healthy economy, the state of health of community banks and in particular the reasons why banks are not lending to business. All those presentations are useful reads (see them here), and in combination give a detailed view of the state of community banks, their relationship to small business and the current nature of their respective problems. Most notably among those presentations were those by the following individuals, who all echoed in one form or another the critical need to inject "capital" (not deposits) into community banks in order to free them up to lend to small businesses again.

Mr. Michael A. Kus, Kus, Ryan & Associates, PLLC, and Legal Counsel, Michigan Association of Community Bankers

Mr. Kus testified to the critical importance of small business in the creation of jobs and the critical dependence of small business on community banks for the financial resources they need to get established and grow. He then reinforced Ken Ross’s message of the need for capital for banks to do their job. “…Access to Capital for Community Banks = Access to Capital for Small Business...Small businesses represent 99% of all employer firms and employ approximately 50% of private sector workers in the United States. The majority of new job creation in the past 10 years has been the result of the 26 million small businesses in America. It is clear that for any meaningful economic recovery to occur in America, America’s small businesses must have access to credit to operate and grow...And small businesses rely heavily on community banks for the credit they need to operate their businesses. Even though community banks represent only about 12% of all bank assets in the U.S., they make up 31% of the dollar amount of all small business loans that are less than $1 million, and 50% of all small business loans under $100,000 in the U.S...”

Mr. Ken Ross, Commissioner, Office of Financial and Insurance Regulation (including banking), State of Michigan

Commissioner Ross talks about the critical need for capital to make community banks healthy. "...Given the pivotal role that community banks play in local economies...regulators are well advised, however to not take an overly rigid approach to banks that can rebound, afforded a reasonable amount of time and flexibility...The regulatory environment should not discourage private capital investments...banks must be allowed to merge, especially if it allows for a resolution of a problem institution...Facilitating the timely merger of a weak institution with a stronger one is good for the system, good for local communities, and is absolutely the least-cost resolution for the FDIC..."

Mr. Art Johnson, President/Chief Executive Officer, United Bank of Michigan and United Community Financial Corp, and Chairman, American Bankers Association

Mr. Johnson talks about the financial state of community banks and in particular their difficulty in raising capital. "...As this subcommittee is aware, however, it is extremely difficult to raise new capital in this financial climate. In some areas of this country, it is impossible to raise new capital. Michigan is particularly hard hit, as the long-term outlook remains cloudy; but we are not alone. There are many communities across this country that are suffering, and the need for capital is acute. Capital underpins every loan that is made. Loan losses resulting from the recession have reduced capital and with it, reduced the capacity to make new loans. Without new sources of capital, banks will inevitably end up shrinking in order to keep regulatory capital-to-assets ratios in acceptable ranges. This, of course, makes it increasingly difficult for community banks to continue to meet the credit needs of their communities...The market for capital, however, is completely dysfunctional…Community banks are the backbone of our economy and are critical to the overall improvement of our economy…"

Mr. Bert Otto, District Deputy Comptroller, Office of the Comptroller of the Currency

Mr. Otto explains how community banks serve small business far better than large banks. "..For banks with assets of less than $1 billion, 56 percent of their business loans are small business loans, as of June 2009. For banks with assets over $1 billion, 21 percent of their business loans are small business loans, as of June 2009...Although a small business is defined as having fewer than 500 employees, most small businesses are very small—the majority of employer firms have fewer than five employees and many are home-based, providing small incomes for mostly part-time owners. These companies provide economic opportunities to diverse groups of people and offer valuable products and services in the market..."