It’s been said that the definition of insanity is doing the same thing again and again and expecting a different result. We can only hope that all parties involved will move past the current focus on bonuses and bailouts and move quickly to address the needs of small business owners who are still finding it difficult to extend the credit they need to launch, run, and grow their ventures.
In a recent report by the Treasury department, the 22 banks that received the most help from the Treasury’s bailout programs have cut their small business lending balance by another $1 billion in November.
Wells Fargo (WFC) was one of five banks that reported higher small business loan balances – and they were by far the biggest small business lender.
This report has surely added fuel to the debate about banks, bonuses, and lending activity. Specifically, are banks not lending to increase their own profits, or are they not lending because of less demand.
Finding that right balance between caution and investment, says Edward Yingling, CEO of the American Bankers Association, is critical to spurring economic recovery.
“Bank regulators need to be prudent without being so punitive that they choke off lending in communities across the country,” says Yingling. “Just as too much risk is undesirable, over-correction will impede economic recovery if banks are prevented from making good loans to creditworthy borrowers.”
In the seventh-month period starting in April, the banks’ total lending has fallen 4.6% to $256.8 billion.
This is where a real debate has to happen. For all the talk about bonuses and reinstating Glass-Steagall (or the spirit of Glass-Steagall), none of the proposals being offered are addressing the risky loan practices that precipitated the financial meltdown.
One solution may already be showing itself through the growth of Community Development Financial Institutions (CFDI) partnerships. CFDIs have long tapped a mix of federal funding, philanthropic grants, and investments from commercial banks to fund their work.
As banks cut back on lending directly to small businesses, CDFIs are expanding their role and tapping recently formed bank holding companies for capital.
Commercial banks have long been among the biggest funders of CDFIs: JPMorgan Chase has invested $1.2 billion in the last five years; Bank of America (BAC) has a $1 billion CDFI portfolio; and Wells Fargo has $400 million in CDFI loans and investments. Goldman Sachs has also recently announced a $500 million national program to aid small businesses.
