Category Archives: small business

Small business loan approval rises —
community banks lead the way

MORE GOOD NEWS from the Biz2Credit Small Business Lending Index:

Small business loans were approved at an overall rate of about 38 percent (from banks of all size). This was the post-recession high for loan approval by banks as a whole.

Community banks continue to lead the way — approving more than 50 percent of loans. Larger banks approved loans at a higher rate in January than they did a month before, but the approval rate of 28.3 percent pales against that of smaller lenders:

“If you have an idea for a new small business or if you want to buy an existing business, you will probably think of talking to your commercial bank about a small business loan first,” writes rosemary Carlson for The Balance Small Business.

But “the approval rates for small business loans are low from [large] commercial banks. In 2004, before the Great Recession, loan approval rates for small business loans from commercial banks were twice what they were in 2017.”

As we noted in “Happy Days are Here Again,” however, there may be a robust small-bank alternative close to home.

Smaller banks, smaller stress. Bigger banks….
(Randal K. Quarles, call your office)

THREE CHEERS for the U.S. Federal Reserve for its recent study, “The Differential Impact of Bank Size on Systemic Risk, by Amy G. Lorenc and Jeffery Y. Zhang.

The study couldn’t come at a more critical time, as the Fed, Federal Deposit Insurance Corporation, and others immerse themselves in implementing the new requirements of the Crapo bank-regulation reform act.

   “Our empirical results,” the authors write, “show that stress experienced by banks in the top 1 percent of the size distribution leads to a statistically significant and negative impact on the real economy. This impact increases with the size of the bank. The negative impact on quarterly real GDP growth caused by stress at banks in the top 0.15 percent of the size distribution is more than twice as large as the impact caused by stress at banks in the top 0.75 percent, and more than three times as large as the impact caused by stress at banks in the top 1 percent.

These results,” they conclude, “support the idea that the largest banks should be subject to the most stringent requirements while smaller banks should be subject to successively less stringent requirements.”

Banking systems systems dominated by large banks are like a majestic ship — they can do many things; they move fast; they have big guns. But if one or two of these great vessels is hit, and sinks…

Community banks, by contrast, function like a network of rafts. They can’t move as swiftly. They don’t have huge guns. Water comes over the side and people get wet… but like a raft, the system doesn’t sink as readily.

Though the passage of the Crapo act in May was a valuable step, the fact remains, as we wrote at the time in “Fed, you’re up next, “it will take well beyond that for the Federal Reserve, FDIC, and other institutions to implement many of the new law’s provisions via regulation — and longer still for their impact to be felt in the real world.”

Note: the Fed acted in late August to implement an important increase in the threshhold level for small bank holding company policy statements to $3 billion — another step forward.

Here’s hoping the rule-writers at the Fed (att: Randal K. Quarles, pictured nearby) take the time to familiarize themselves with the Fed’s own important research contribution.

A cri de couer for regulatory reform — Kathryn Underwood

Writing in American Banker, Ledyard National Bank CEO Kathryn Underwood, makes the case for legislative and regulatory relief for community banks.

Excerpt:

Tailoring rules to the size and risk profile of regulated institutions will not only ease the burden on local institutions and reduce the pressures that are stifling our ability to serve our customers, it will also help preserve our diverse and decentralized banking system.

Full article, “Community banks like mine sorely need regulatory relief ,” here.

Community bank squeeze continues

    THE TABLE NEARBY illustrates the declinle of small and community banks since 2008 as reporter by the Federal Deposit Insurance Corporation, or “FDIC”

    (Note: March, 2018 figures will be released in a few weeks; the chart reflects a Freedman’s Foundation estimate based on public filings.)

    The falloff is italicized by the fact that large banks (which can more easily bear the fixed cost of regulation) continue to surge.

Indeed, a quick glance at the FDIC‘s estimates for the capitalization — see table below — show the increasing concentration of banking assets into the hands of a few institutions.

Concentration renders an industrty less competitive, less diverse, and more vulnerable to systemic shocks.

There’s also rich irony in this trend, given that one of the main goals of “banking reform” embodied in Dodd-Frank was to bring large financial institutions — those “too big to fail” — under control.

Legislative and oversight changes over the last 20 years definitely succeeded in adding regulations. They produced, however, not only unintended consequences — but in the case of large banks and the banking sector, virtually the opposite of their stated goals.

Dodd-Frank turns 6

This summer (July 21) will mark the sixth anniversary of Dodd-Frank…

with what critics say is “no end in sight” to the squeeze on small businesses served by the small community banks the bill — sponsors originally said — was designed to help.

(At 22,000 pages, and having spawned 27,000 pages of new regulations, the act certainly had a major impact.)

Research out of the Minneapolis Federal Reserve suggests that adding just two members to the compliance department to process these regulations makes a third of small banks unprofitable.

At the end of 2014, there were 20 percent fewer community banks today than there were before this legislation took effect, and they continue to disappear at a rate of one per day.

In a typical year in recent American history, 100 new banks are created, but since Dodd-Frank passed, only three have been created in total.

Meanwhile, the big banks are now 80 percent larger than before the financial crisis.

Small banks, it’s true, have only 10 percent of the banking industry’s assets, but make one-quarter of the country’s commercial loans, two-thirds of its small business loans, and three-quarters of its agricultural loans.