Today, the House Financial Services Committee held a hearing entitled “Initiatives to Promote Small Business Lending, Jobs and Economic Growth.” Testifying before the Committee were the following witnesses:
- Gene B. Sperling, Counselor to the Secretary of the Treasury, U.S. Department of the Treasury
- Christian S. Johannson, Secretary, Maryland Department of Business and Economic Development
- Paul Brown, Manager, Capital Markets Development, Michigan Economic Development Corporation
- Paul Atkins, Member, Congressional Oversight Panel; former Commissioner, Securities and Exchange Commission
- James MacPhee, Chief Executive Officer, Kalamazoo County State Bank
- Daniel A. Mica, President and Chief Executive Officer, Credit Union National Association
- Jim Determan, Senior Associate, Hord Coplan Macht, Inc.
In opening remarks, Chairman Barney Frank (D-MA) directed the day’s discussion toward the “serious problem” of ongoing credit restraints suffered by small businesses. Recalling prior hearings in which “blame was passed around”, Chairman Frank maintained that present efforts were concerned with devising measures to ease difficulties and enable the government to move forward with its “number one job of continuing the recovery.”
Mr. Sperling opened witness testimony by asserting that there is “no single silver bullet” to respond to the credit crisis affecting small business. Rather, government must employ a comprehensive methodology that emphasizes both supply and demand initiatives. Mr. Sperling then suggested that demand-side initiatives are currently well-represented, calling the government engineered movement from 6.4% contraction in the first quarter of 2009 to average expansion of 4.4% in the last two quarters “one of the greatest swings we’ve seen in probably a century.”
Yet, Mr. Sperling maintained that it was “wrong” to ignore data suggesting that supply-side initiatives have thus far been inadequate. Citing reports from the National Federation of Independent Business and the National Small Business Association indicating that as many as 45 percent of credit-worthy borrowers are unable to get the credit they seek, Mr. Sperling addressed theObama Administration’s proposal to create a $30 billion Small Business Lending Fund (SBLF), calling it “a cost-effective means of supporting small business.” As proposed, the SBLF would be limited to banks with under $10 billion in assets, which account for over 50 percent of all small business loans nationwide. Participating institutions would pay a dividend of 5 percent, which could drop to as low as 1 percent if a given institution increases small business lending over its baseline of 2009.
Members of the Committee questioned the SBLF’s prospects, first raising what Jeb Hensarling (R-TX) described as the unsettled issue of whether bank capital insufficiency or lack of credit-worthy demand lies at the heart of the small business credit crisis. Mr. Atkins affirmed that in the fourth quarter of 2008, 57.7 percent of respondents to the Federal Reserve Board’s (Federal Reserve) Survey of Senior Loan Officers reported that demand had fallen for small business loans and that another Federal Reserve survey last month indicated that demand has “weakened further.” To the extent that contraction in small business lending reflects a shortfall of demand for credit rather than of supply, he suggested, any supply-side solution that relies on improving bank balance sheets will fail to gain traction. Witnesses Determan and MacPhee then testified that significant credit demand does indeed exist and that congressional action is absolutely required. Committee member Melvin Watt (D-NC), agreed, stating that while it may be “politically expedient to just say no”, due consideration is in order for all possible measures.
Committee member Spencer Bachus (R-AL) suggested that the best measures do not involve further government expenditures and inquired about alternatives to government funded programs. Mr. Mica responded at length, focusing his comments on the need for legislation designed to aid ready lenders. Mr. Mica maintained that credit unions have long advocated raising the current 12.25 percent of assets cap on member business lending to 25 percent, estimating that doing such could result in $10 billion in new funding for small businesses. Mr. Mica further testified that this new funding could create as many as 108,000 new jobs, emphasizing that these new jobs would be created at no cost to taxpayers and with safety and soundness as demonstrated by credit unions’ “proven track record” of serving community borrowers efficiently. Chairman Frank responded that the committee would address credit union lending limits “fairly soon.”
Committee member Hensarling then asked why Treasury and the Obama Administration had not considered increasing lending limits to allow private money to more fully participate in small business revitalization. Mr. Sperling responded that strengthening small banks is a higher priority, given the large role they play in small business lending. Mr. Sperling then addressed a related concern that the SBLF, in providing cheap capital for lending and penalties for failing to lend, poses the risk of creating a “moral hazard” whereby banks may be encouraged to make loans to borrowers who are not creditworthy. Mr. Sperling maintained that this concern is minimal, since any institution that receives funds under the SBLF is obligated to repay that money to Treasury and therefore will lose money if it makes a bad loan.
Moving from the SBLF, Chairman Frank raised questions about the proposed new State Small Business Credit Initiative (SSBCI), jointly conceived by members of Congress and Treasury. Mr. Sperling explained that the SSBI would provide grants to those state small business programs facing increased demand in the wake of budget shortfalls. Funding would go to state programs that enable private lenders to extend credit to creditworthy small businesses, ensuring that loans are made with sufficient underwriting standards.
Mr. Brown, who oversaw a similar plan in Michigan, stated that the SBCI would create a significant "bang for the buck," as states would be required to support at least $10 of lending across all programs for every Federal dollar received. Mr. Sperling cited some support among Congress members to fund the SBCI at $2 billion, an amount Treasury believes would ultimately infuse $20 billion into the economy.
Committee member Maxine Waters (D-CA) raised a final notable issue, voicing concern that that none of the day’s suggestions seemed to address the needs of minority borrowers. Stating that support from the Congressional Black Caucus, the Hispanic Caucus and the Asian Caucus for the Obama Administration is not a “rubber stamp” for any reform bill, Ms. Waters asked Mr. Sperling if minority taxpayers could expect initiatives to promote minority lending and policy to assist minority owned financial institutions. Mr. Sperling responded that he would get back to Ms. Waters later in the day on the matter and indicated that there were several sensitive discussions ongoing in the Senate regarding the Office of Minority Assistance and other issues.
