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Small Businesses & Banks Buried by Regulations

Posted By Tait Trussell On July 8, 2011 @ 12:04 am In Daily Mailer,FrontPage | 13 Comments

The law against “too-big-to-fail” is making some banks “too-small-to-survive.”

New Democrat-inspired federal rules and regulations are dramatically jacking up lending costs while limiting access to capital needs of small businesses and individuals.

As one banker testified June 16 before the House Subcommittee on Economic Growth, Tax, and Capital Access, “New rules substitute Washington bureaucratic judgment for that of local bankers.”

In every community, banks are actively looking for lending opportunities, said the American Banking Association (ABA), the voice of the $13 trillion banking industry. But in the lingering Obama depression, all businesses, including banks, are fearful about taking on new financial obligations. Business failures and high unemployment have impaired credit quality and increased loan losses. Despite these headwinds, banks were able to originate about $1.7 trillion in new loans in the third quarter of 2010, the ABA said.

Today, bankers are asking more questions of borrowers, and regulators certainly are asking more questions of banks. Banks don’t turn down loan applications because they don’t want to lend. Lending is what banks do. But just as too much risk is too risky, regulations that discourage banks from making sound loans has severe economic results. Regulatory over reaction means fewer loans and can “set in motion a ‘death spiral’ where the borrower has to sell assets at fire-sale prices to raise cash, which then lowers the ‘market values’ of other assets, which increases the write downs the lender has to take, and so on,” noted the ABA.

At the June 16 House hearing, Thomas Boyle, vice chairman of State Bank of Countryside, in Countryside, Illinois, told the subcommittee that the “hundreds of new regulations expected from the Dodd-Frank Act…are slowly but surely strangling traditional community banks[.]” (The 2,253-page Dodd-Frank law is said to be the most complex financial law ever enacted. It was promoted as a way to stop the problem of too-big-to-fail. The result is some banks will be too-small-to-survive.)

“With the regulatory over-reaction, piles of new laws, and uncertainty about government’s role in day-to-day business of banking, meeting local community need is difficult at best,” testified Boyle. “Without quick and bold action to relieve regulatory burden we will witness an appalling contraction of the banking industry…that will inevitably translate into fewer loans to small business….New rules substitute Washington bureaucratic judgment for that of local bankers.”

Business owners rank access to capital as the most important issue for privately held companies, according to a poll of 1,221 owners across the U.S. released by Pepperdine University. Only 17 percent of businesses with less than $5 million in revenue and seeking loans got bank financing last year, according to the survey. Some 48 percent of respondents report they were seeking bank loans as a source of funding, followed by friends and family (21 percent) and private investors (11 percent). According to the Pepperdine study, more than 60 percent of the bankers said they have rejected loans they otherwise would have made to oblige federal regulators.

We all remember when, in December 2009, our typically intemperate President scolded what he called “fat cat bankers” whom he charged were fighting his efforts to revamp financial regulations. While some individual bankers aren’t Obama-like skin and bones, more than 3,200 banks (41 percent) are themselves small businesses—with fewer than 30 employees. Hardly fat cats.

The Federal Deposit Insurance Corporation (FDIC) has 888 banks on its “problem bank” list, according to Investing Answers website July 4. Last year alone, it said 157 banks failed. “About half of all that have failed in the last decade did so in the first nine months of 2010,” it said, adding that 407 of the more than 7,500 banks in the country could be in danger.

Cass Sunstein, Obama’s regulatory czar, in his annual report to Congress released in June, came up with these patently squishy numbers: Regulatory benefits of $18.8 billion to $86.1 billion. And cost of $6.5 billion to $12.5 billion.

In the Washington Post, Sunstein scoffed at the notion that the administration is burying business under loads of regulations. Sunstein falsely claimed that the Obama administration had issued fewer regulations than had the Bush administration. The U.S. Chamber of Commerce pointed to an avalanche of regulations in the pipeline: 159 new panels and agencies under the health-care law, 447 rule-makings under Dodd-Frank, more than 100 under EPA, and 100 rule-makings at the Labor Department, for instance.

A survey of members by the National Federation of Independent Business in June found the outlook for small business remained bleak coming into this year, as fewer and fewer owners sought access to credit. It’s a trend that has continued since 2009. The survey indicated an increase in discouraged borrowers or those who have quit trying to get credit. The survey was of 3,530 small business owners.

Small businesses are central to economic recovery and growth. The length of this past recession and the poor subsequent recovery are largely about entrepreneurs staying on the sidelines, unwilling to expand, invest and borrow. They see a massive expansion of activist government not as an aid, but as a serious threat.

Raymond J. Keating, general council of the Small Business & Entrepreneurial Council, said exactly this: “The length of this past recession and the poor subsequent recovery are largely about entrepreneurs staying on the sidelines, unwilling to expand, invest and borrow. They see a massive expansion of activist government not as an aid, but as a serious threat.”


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