ABA Testifies on Ways to Improve Lending to Small Businesses

WASHINGTON – The American Bankers Association testified Monday on the impact that the recession is having on lending to small businesses.

Testifying on behalf of ABA at a field hearing held in Southfield, Michigan before the House Financial Services Committee, Arthur C. Johnson, ABA chairman and chairman and chief executive officer of United Bank of Michigan, headquartered in Grand Rapids, said that despite the difficult economic climate bankers are working to ensure that the credit needs of their communities are met.  Johnson also said that there are actions the government can take to assist viable community banks as they weather the current economic downturn.

“Small businesses of all kinds – including banks – are certainly suffering from the severe economic recession,” said Johnson.  “While statisticians will say the recession has ended, that is little comfort to areas in Michigan and elsewhere in the United States that still suffer from very high levels of unemployment and business failures.  The impact of the downturn is being felt by all businesses, banks included.”

Johnson noted that most community banks entered the recession with strong capital levels, but that it is extremely difficult to raise new capital given the current financial climate.  He said that in some areas of the country it is virtually impossible to raise new capital and that Michigan has been hit particularly hard.

“Capital enhances the lending capacity of banks,” said Johnson.  “Without new sources of capital, banks will inevitably end up shrinking in order to keep regulatory capital-to-assets ratios in acceptable ranges, making it increasingly difficult for them to meet the credit needs of their local communities.”

Johnson offered some recommendations for how the government can assist viable community banks.  He reiterated ABA’s call for an investment of up to $5 billion of TARP money in community banks that did not receive Capital Purchase Program (CPP) funds.  This could be accomplished through suggested modification of the criteria for participation in the Capital Assistance Program (CAP).

“A $5 billion commitment by Treasury is well below half of the dividends and warrant repurchases received by Treasury from CPP participants and less than 4 percent of the total CPP funds invested to date.  Our projections show that an estimated 2,000 community banks would be potentially eligible.  Capital is absolutely critical to any bank, as it is the financial underpinning of any loan that is made.”

Johnson recognized that credit terms are different today, as both banks and their regulators are exercising more prudence when it comes to lending, and that businesses too are being more cautious in taking on new debt.  However, he maintained that banks do not turn down loan applications because they do not want to lend.

“Let me be very clear here: even in a weak economy there are strong borrowers.  Every bank in this country is working hard to ensure that our customers – particularly the small businesses that are our neighbors and the lifeblood of our communities – get the credit they deserve.”

Finally, Johnson said that the changes in the regulatory environment would improve the situation for small business lending.  He said that it is a natural tendency for bank regulators to intensify scrutiny during tough economic times, but also stressed that while too much risk is undesirable, a regulatory policy that discourages banks from making good loans has serious economic consequences.

“What the regulators want for the industry is what the industry wants for itself: a strong and safe banking system,” he said.  “To achieve that goal, we need to remember the vital role played by good lending in restoring economic growth and not allow a credit crunch to stifle economic recovery.  We must work together to get through these difficult times.”

For a copy of Johnson’s full testimony click here.

The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation’s banking industry and strengthen America’s economy and communities. Its members – the majority of which are banks with less than $125 million in assets – represent over 95 percent of the industry’s $13.5 trillion in assets and employ over 2 million men and women.