Federal fund a capital idea

February 12, 2010
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(Editor’s note: This is the first installment  in a series of stories examining the proposed creation of the Small Business Lending Fund.)

The Michigan Association of Community Banks fully supports the creation of the Small Business Lending Fund that President Barack Obama has been promoting.

The association, which is based in East Lansing and has 110 small and community banks on its statewide membership roll, views the president’s proposal as a way to reconnect its members with small business owners and as a good investment that will help create jobs.

“We see it very positively. This initiative was strongly pushed by the Independent Community Bankers of America, which MACB is associated with,” said Michael Kus, a spokesman for MACB.

Obama wants to use $30 billion that has been repaid by big banks from the Troubled Asset Relief Program to fund the SBLF; those funds would be made available to banks with assets of $10 billion or less. About 8,000 banks in the U.S. qualify to receive those dollars, which, in turn, would be lent to small businesses.

The program’s concept is to pump up the banks’ balance sheets and enable the financial institutions to make more loans to small businesses that want to expand, hire workers or make other investments. And banks that increase lending via the SBLF would get reductions in their federal dividend tax rate for up to five years.

Kus said the lengthy relationship that community banks had with small businesses was disconnected during the financial crisis and MACB feels the lending program can reconnect the two.

“It became loud and clear that small businesses were having a difficult time obtaining loans, as a lot of loans to small business were based upon the value of their assets, particularly their real estate. And with real estate values falling, that became a particular problem,” he said

“Secondly, banks in general — particularly community banks — were having a difficult time in making loans: one, because they didn’t have the available money to lend and, secondly, they were being, I’m going to say, overregulated by the FDIC and the Fed Reserve to the extent that they made the conditions for lending very tight,” he added.

Kus said those conditions forced bank officials to hang on to their remaining capital in order to offset any additional losses that might come their way later. So their lending bases weren’t expanded following the financial upheaval on Wall Street, and loans dried up in fear of repercussions that might come from regulators.

“So those loans that they were making tended to be very tight, very conservative. They weren’t willing to make loans to what I would say would be the A-minus borrower, for fear that they were going to be criticized by the regulators, or for fear that they were going to suffer additional losses. Secondly, they had to put money into the loan-loss reserve,” said Kus, also a partner in Kus, Ryan & Associates PLLC in Auburn Hills.

“So they were quite hesitant to make additional loans. I think this initiative will help significantly. We haven’t seen all the rules yet, but it appears that the money would be given to institutions after approval by their primary regulator.”

If the program is created, then the big question becomes which banks will get the money. Kus said regulators are likely to use composite ratings to distribute the funds. But MACB wants the dollars made available across the entire ratings system — even to banks that are having capital problems — rather than limiting allocations to the usual banks with the highest ratings of 1 and 2.

“We’re hoping that they would consider banks that are 4s and 5s, to shore up their capital to allow them to begin lending again and also get them back to a well-capitalized scenario,” he said. “Everybody needs to get capital. The problem is capital is not available in the capital market.”

But before any money is distributed, the SBLF has to be created, and Congress has to do that. Because the $30 billion in returned TARP funds is supposed to go to the federal deficit, legislation is needed to transfer those dollars to the lending program. And that action is not a sure thing.

Many in the banking industry have said it isn’t a lack of capital that has slowed lending. They’ve said loans are down because there aren’t enough creditworthy borrowers, and many smaller businesses are simply reluctant to borrow in this economy. MACB, however, disagrees.

“One, I would disagree with completely — capital is not readily available. We have sought capital for banks in Michigan for the last two years and we’ve worked very closely with the administration, with the investment bankers in Michigan and they’ve worked very diligently to try to raise capital for banks in Michigan. And they’ve had a very difficult time in finding capital,” said Kus.

One reason Kus gave for that scenario is investors can buy the troubled assets of failed banks from the Federal Deposit Insurance Corp. at discounts as high as 50 percent and can quickly sell those securities for a return of 20 to 30 percent — a much bigger take than they can get from investing in a community bank.

“That’s the kind of competition we have in the capital markets today,” he said. “If you can get capital, it’s very expensive. We’re talking 8, 12, 15 percent.”

Nor does MACB believe that there aren’t qualified and creditworthy businesses out there to service. Kus said he has attended congressional hearings where small business owners have testified they are getting contracts but haven’t been able to secure loans based on their accounts receivable or on their income from those contracts.

“These are businesses that have been around a long time and have a good track record. So I don’t buy either argument,” he said.

But the association does “buy” the president’s proposal as possibly being a capital idea.

“I don’t want to generalize here but the big banks aren’t looking to help the company that has revenue of, let’s say, $1 million to $10 (million) or $15 million today. To them, that’s not their wheelhouse. That’s where the community banks have been the lifeline on Main Street for these companies,” said Kus.

“And I think this $30 billion is a good investment for government, considering the hundreds of billions of dollars that have been given to the large banks that really don’t help finance the small business on Main Street. This could be a very good investment to help create jobs in the private sector.”

Next week: Community bankers express views on the program.

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