MBL Myths That Hurt Small Businesses

by Henry Meier

How bad are things out there for the small business owner looking for a loan?  Improving, but still bad.  What’s more, things aren’t going to get much better any time soon.

Don’t take my word for it.  According to an excellent analysis released by researchers at the Federal Reserve Bank of Cleveland yesterday, recent declines in small business lending not only reflect the continued impact of the Great Recession, but “also. . . longer-term trends in financial markets.  Banks have been exiting the small business loan market for over a decade.  This realignment has led to a decline in the share of small business loans in banks’ portfolios.”  According to the researchers, the fraction of small business loans of $1 million or less in banks’ portfolios has dropped from 51% in 1998 to 29% today.

What do they think is behind this systemic decline?  First, consolidation has reduced the number of small banks but more provocatively, they suggest that increased competition in the banking sector has made banks concentrate on attracting bigger, more profitable loans at the expense of small business loans.  To steal a line from investment banking, it takes just as much time to put together a small deal as a big one.

Whenever credit unions put on a serious press for increasing the MBL cap, they are inevitably confronted with the testimony of an earnest mid-Western community banker whose family has sponsored the local Little League team in Pleasantville for the last five generations.  He explains to Congressmen that he would love to offer more small business loans, but that small businesses simply aren’t asking for them.  The MBL cap, he argues, won’t increase the number of business loans but simply add to the competitive pressures of God-fearing, tax-paying community bankers, who, by the way, are represented by one of the most politically connected lobbying groups in DC.

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