Big Banker Sez: Time To Help The Small Banks

By Bizbox

A few days ago, the New York Times's Joe Nocera reported on big banks' plans to take the billions in government money they are getting from the $700 billion bailout package and use it not to increase loans and unfreeze the credit markets but to acquire smaller banks--this is, in fact, what the Treasury Department itself wants them to do, according to Nocera.

Today, on his blog, Nocera prints an email from a "small business banker and credit underwriter" at "one of the country’s biggest banks". His argument? The government needs to start lending to small banks--the community banks--specifically in order to make sure that small businesses can get loans. As he puts it (he's identified as a he), "The government has already done plenty for the big banks. It needs to stop worrying about them now. Instead, it need[s] to pump money into the local community banks because those are the bankers who understand their markets, and know the businesses in their markets."

And: "If we make the bailout funds available to the community bankers, I promise they will know what to do with the money. They will lend it and they will make prudent lending decisions, based on direct and comprehensive knowledge of the borrower. So what are we waiting for?"

...well??

We've written extensively about the community banks since the economy first cratered in September. They're crucial to BizBox's beat right now, for they are at once the small businesses of the all-important financial industry as well, we believe, a vital place for small businesses to turn to for credit in the coming months.

Anonymous Big Banker's point is that the big banks, who don't have strong community ties and instead rely on impersonal metrics like credit scores, are not going to be lending to small businesses as long as the credit markets are remotely this bad (tell us something we don't know). He says, "Big banks like the one I work for typically have an aversion to lending to companies whose sales and profitability trends are deteriorating, even in tough times like these. Thus, very credit-worthy businesses are having their lines cut back or closed down." The community banks, by contrast, know the local entrepreneurs and will be willing to lend if they have enough capital to do so. Enter the government.

Politely asking big banks to lend to small businesses won't get the job done, according to Anonymous Big Banker. (We made this same argument when advising that the government compel small businesses to use some of their newfound capital to ensure a steady stream of Small Business Administration-backed 7(a) loans.) Instead, he suggests that the government--which has a just a teensy bit of leverage since it is giving these banks hundreds of billions of dollars, and is also, you know, the government--compel the big-bank recipients of government capital to use fairer lending standards that will result in increased loans to small businesses. He also advocates making more of the government funds available to small businesses.

While we're quite sympathetic to Anonymous Big Banker's perspective, we do have a couple quibbles.

First off, his email to Nocera seems to have been written under the assumption that the feds would like the big banks to use the capital to increase their lending, and that they're simply going about achieving this goal in an unwise way. But Nocera himself, in his column, alleged, "Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation." In other words, it's entirely possible that the government does not want increased lending, at least as compared to how much it wants increased financial industry consolidation. Which is a huge problem, to be sure, but a different one altogether.

The second problem is that the community banks appear reluctant to take the goverment cash, as we reported. Still, they could perhaps be persuaded that despite the fact that they pursued prudent business strategies while big banks went on an irresponsible binge, there is no dishonor in taking government cash, if only in order to make the post-bailout playing field more level.

One thing is clear: the government needs to act, and fast, to get cash flowing to small businesses. Otherwise, the 57% of small business owners who said this past month that they disagree with the bailout is going to look like a good figure.

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October 30, 2008 3:52 PM