The New 30 Billion Community Bank/Small Business Initiative:  If you are like me, you shuddered last Wednesday night when you heard the President announce to joint session of Congress the desire for Congress to authorize and pass a new fund for community banks…some 30 billion dollars of repaid TARP to be made available to community banks under 10 billion in total assets for small business lending.  This week, the President laid out the specifics of the plan. 

My initial skepticism centered on three central issues:

 1.    Would the program look anything like the TARP of old and the onerous strings connected with acceptance and repayment?;

 2.    Do community banks really need more liquidity at a time when small business lending demand is lackluster; and,

 3.    What would be the public perception associated with accepting a government stimulus initiative, even one that is meant to benefit small business?

After a cursory review of the program, I must say it is a good start.  The program has no similarities to the troubled TARP program the American public has grown weary of.  We can all thank the Independent Community Bankers Association of America (ICBA) for the role they played in its final design.

 Unfortunately two central issues remain.  One, credit worthy borrowers are scarce and apprehensive to expand inventories and personnel until such time as economic conditions improve.  And second, community banks have deep reservations about accepting any perceived “government assistance.”  These two reasons alone will likely inhibit the program’s acceptance and success.

I am not one to look a gift horse in the mouth.  We should all be grateful that this Administration has come to realize that community financial institutions can play a significant role in America’s economic recovery and is willing to provide financial assistance.  The small business sector relies on the general well being of the local bank as a principal source for their credit needs and it is the small business that fuels job growth to the tune of three out of every four net new jobs created in this country.  And we learned in that same state of the union speech that jobs are priority one of this administration, at least in the short term.

But if the Administration is intent on really stimulating lending to small business via the community banks, two things must happen.  They must encourage the regulators to exercise some forbearance in commercial real estate concentrations and valuations, and relax policies that require these same institutions to increase core capital beyond what has traditionally been regarded as acceptable capital guidelines. A suitable alternative would also provide the legislative means for banks to grow capital.

The facts are these.  Community bankers are passing on good loans to long established credit worthy borrowers to avoid concentrations (and regulatory criticism or enforcement action) in the commercial real estate sector. And how are most small business loans secured?  Owner occupied commercial real estate.

There are too many legislative and regulatory roadblocks prohibiting community banks from growing core capital. Congress should take immediate steps to allow banks, particularly Subchapter S banks (which now number in the thousands nationwide) to increase capital by permitting these institutions to issue a second (preferred) class of stock.  In addition, C corp. banks and S corp. banks can both benefit by changing the onerous accounting rules which require banks to mark real estate to a temporarily impaired market value, thereby artificially depleting capital.

Finally, Congress should permanently change the deposit insurance assessment rules to an asset based formula which would transfer the burden of recapitalization and long term stability of the fund to the systemically important too big to fail banks commensurate with risk.  More capital could be retained by community financial institutions and be put to use in the small business lending sector.

IBAT has been among the leaders in advocating these changes for some time. We must continue our efforts to make our voices heard.  None of these solutions carry the stigma of another government/taxpayer bailout, and provide real stimulus.

I fear this gift horse will never leave the starting gate.  Let’s saddle up and advocate for positive legislative and regulatory change to ensure that many good small business entities will continue to have access to the credit they need and deserve.