Emily Maltby of the Wall Street Journal recently wrote an excellent article entitled, “The Credit Crunch That Won’t Go Away.” She reasoned with things on the mend, “Forget the economy. Entrepreneurs still find it hard to get a loan. Where’s the money?”

The fact is that well before any entrepreneur even considers borrowing money, they must contend with a never-ending barrage of government regulations, which are intended to make any go/no go decision very difficult. All the red tape was barely addressed in Ms. Maltby’s story. She did fault the borrower class, the bankers, government and the economic times for holding back borrowers from obtaining credit.

The article cited the “boatload of programs” provided by the Obama Administration to get small business financing. “President Obama has urged banks to give the companies a third and fourth look before rejecting them for loans.”

This is really not the case. The Obama administration has used the stimulus funding to prop-up unionized state workers and teacher payrolls. It has nationalized the automobile industry to make sure salaries and retirement benefits of UAW members were protected before a bankruptcy court could reduce them. In reality the federal bank examiners and the regulatory environment are the real culprits in making sure the flow of bank credit is stopped up.

In her story, Ms. Maltby says the, “regulators say banks are just making them the fall guy.”

Well, they are. Official Washington is unable to confront Wall Street, as well as unable to admit their own culpability in lowering the lending standards of Fannie Mae and Freddie Mac. They are lashing out at America’s community banks that had nothing to do with the real estate bubble or Wall Street product development abuses.

Let’s consider reality - commercial banks of which Oklahoma has many, could still be lending to their communities as they have for years if it weren’t for new regulations Enter the regulators with their new financial guidelines to curb Wall Street excesses.

First, they insist capital must be raised by 20 percent. Then they raise the loan loss reserve and restrict dividends. Many banks are also paying as much as 500 percent more for FDIC insurance. As for lending, don’t make any commercial real estate loans. Do you think these requirements hobble lending? If a bank can’t attain these new benchmarks, they run the risk of being closed. So much that goes on in banking is hidden from public view. It really shouldn’t be. We deserve to know why credit is tight and who is responsible.

Ms. Maltby also wrote, “Sometimes the regulators are a convenient excuse for banks who really don’t want to tell borrowers they can’t make the loan.” That quote is from Timothy W. Long, senior deputy comptroller and chief national bank examiner at the Office of the Comptroller of the Currency. Its obvious Mr. Long was either misquoted or lacks any understanding of how community banks produce income.

My definition of a community bank is one with assets between $50 and $500 million. Their income is almost entirely derived by loans, loan fees and customer demand and saving deposits. They do not have trading platforms which make the bulk of Wall Street’s investment bank profits.

In other words how the community goes is how the bank goes. I’m reminded of a time when I ran a bank and one of our directors announced that the bank should shut down our lending function until the economy improved. I looked around the table and saw some nodding heads of approval. “Well, I said we need to put so many dollars per month in the loan loss reserve. We can do that one of two ways out of the customers pocket or we can do it out of yours.” Needless to say, there was no second motion to shut down the bank’s lending.

The answer to the article actually comes in the first paragraphs. Beef up SBA lending.

If the government really wants to help borrowers they should allow far more government insured loans. Today SBA loans are hard to get, cumbersome and very restrictive. From the lenders point of view, an SBA guarantee does not count adversely against the bank’s loan concentrations and capital requirements. The bank makes loans based on its own underwriting standards but gets a portion of its risk guaranteed so it can make more loans. The trick here is to keep politicians from gaming the system by making loans to themselves and favored groups.

Life really shouldn’t be so difficult.

This entry was posted on Thursday, July 22nd, 2010 and is filed under Columns.