Help for Small Banks and Thus for Small Businesses: Is It Finally on the Way?

Help for Small Banks and Thus for Small Businesses: Is It Finally on the Way?

There may be a new problem facing financial institutions from commercial real estate loans becoming due in 2010 and will thereafter need refinancing. If small and mid-size banks become concerned about the losses, they will likely make fewer small business loans. But small businesses are often the tenants of commercial real estate and if they cannot expand due to a lack of loans, then problems will worsen for commercial real estate projects.

Prof. Fanto writes: There has been much complaining about the overall lack of availability of loans from banks to businesses, particularly to small businesses. It is recognized that small businesses are the centerpiece of the economic recovery because they provide over half of the employment for the working population in this country. It has also been acknowledged that there has been a disparity in lending to small businesses depending upon the kind of financial institutions. Small or mid-size banks (often referred to as those with less than $10 billion in assets) have been found actually to have increased their loans following the outbreak of the financial crisis. By contrast, the largest banks have decreased their loans during this period.

Now, as everyone is more than aware, the largest financial institutions, such as Bank of America and Citigroup, were the ones that nearly brought down the financial system and that, paradoxically, received, and continue to receive, the lion's share of government aid. These are the "too big to fail" institutions. By contrast, mid-size and small financial institutions suffered as a result of the economic downturn that followed the financial collapse, and they were allowed to fail in significant numbers. Indeed, approximately 140 banks with over $171 billion in assets failed in 2009. The Obama Administration has recently promised to correct its focus on the big banks and to bring help to smaller financial institutions, primarily as a way to help small businesses.

This comment reviews several recent business and legal developments for small banks and small businesses. It first reviews a significant problem on the horizon for small and mid-size banks, the impending refinancing of commercial real estate. It next reviews the Administration's significant proposal to aid these financial institutions through establishing a fund to increase their capital and to encourage them to continue to lend to small businesses. The comment then points out how federal and state bank regulators have promised regulatory flexibility to these banks in order to encourage them to continue making small business loans. Finally, the comment discusses the growing recognition that the position of small and mid-size financial institutions cannot be improved unless significant restrictions are imposed on the large banks. [footnotes omitted]

Access the full version of "Is Help for Small Banks and Small Businesses on the Way?" with your lexis.com ID

If you do not have a lexis.com ID, you can purchase the Emerging Issues Analysis content through our lexisONE Research Packages