February 5, 2010

Having reviewed yesterday's letter submitted to Secretary Geithner by eighteen US Senators, it is apparent that, while their hearts may be in the right place, their lack of personal business experience, particularly a banking background leaves them severely lacking in understanding how banks work.

Banks, particularly community banks earn money in three distinct ways...from fee income; from earnings on their investments; and from the spread they are able to achieve between their costs of funds and the interest income they are able to gleen from loans. Loan interest rates are largely driven by the market in which that bank operates, however Small Business Administration ("SBA") loans are further restricted by the SBA's maximum rates (Prime + 2.75%, for loans above $150,000). If the interest rate being charged to the community banks is 5.0% (as it is under TARP) and the maximum rate that banks are allowed to charge for most loans is 6.0%, then there is inadequate "spread" for the bank to generate profits.

In speaking with an SBA Department manager yesterday, I learned that his bank's cost of funds was approximately Prime - 2.00%, which I believe is indicative of similar institutions. Since that puts their "spread" at 4.75%, the bank is able to generate profits and is actively lending to small businesses.

The government has not learned from its experience with TARP monies and large banks, wherein the banks took the funds, but re-paid them as quickly as possible...not only because they were unable to generate profits on those funds, but also to avoid the compensation restrictions that were included in the program.

This is further evidenced by the reduction in outstanding small business loan balances at the larger banks, while they still had TARP money. Unless, and until a government program allows for banks to earn a profit, they will not participate, or at least not on a meaningful basis.

Politicians have done a tremendous job of sending out press releases and providing sound bytes about how they have "given" all this money to banks and banks are simply not making new loans. These same politicians that are on our televisions and radios and in our newspapers complaining that banks are not lending are the ones responsible for overseeing bank regulators. Bank regulators have been charged with cleaning up bank Balance Sheets and are telling banks, specifically community banks to increase their capital and not lend. Since regulators have the power to shut down the bank, are community bankers more likely to listen to the regulators or to complaints in the press? The answer to this question appears obvious.

The Stimulus Plans, including TARP and TALF have only been partially funded since their passage, however the SBA secondary market was able to right itself. Loans with terms of 25 years are receiving premiums up to 10%, when they were closer to 3% when the financial industry troubles began.

As strange as it may sound, perhaps the way to increase small business lending is for the regulators to be directed to reduce their requirements for banks, if they are actively making small business loans. Obviously, this could not be to a dangerous level, yet enough to allow banks to offer loans to the small business community.

Bill Luckinbill
The SBA Guy, LLC
www.thesbaguy.com