The 1980s supermodel Linda Evangelista once said. “We don’t wake up for less than $10,000 a day.” That seems to be the motto of American bankers, (save Citigroup’s Andrew Hall, who needs 40 times that much per business day). Not only do they not care about things banks used to deem as important, like playing a role in their community, now they can’t even be bribed to go along with pretending that they care.
The latest object lesson is the complete lack of interest in banks in a new SBA lending program. The banks say the loans are too small and too much trouble to be worth the bother, even with a Federal subsidy. I gather it doesn’t occur to them if banks don’t lend to small businesses, which have been the only engine of job growth, we won’t have much improvement in unemployment, and if unemployment doesn’t fall, we won’t have a much in the way of recovery, and if we don’t have much of a recovery, they won’t have much of a business. The banks want to be a free riders on someone else doing whatever it takes to get the economy back in gear.
From the New York Times:
Small-business owners hoping for some assistance of the sort given to the nation’s biggest banks applauded when the Small Business Administration unveiled a lending program in May….
But the program is off to a slow start, and many banks, including some of the largest, appear reluctant to take part.
With $255 million, the program is prepared to make about 10,000 loans of up to $35,000 each. As of Monday, the agency reported that only 1,127 loans, totaling $36.8 million, had been extended.
While the agency maintains that the program is on track, some in the banking industry say the banks are moving slowly because they have little incentive. “There’s not a lot of profit motive in a $35,000 loan stretched over six years,” said Paul Merski, chief economist for the Independent Community Bankers of America, a trade association.
Bob Seiwert, of the Center for Commercial Lending and Business Banking at the American Bankers Association, says “stringent underwriting standards” will require as much work as larger loans, making these even less economical….
Yves here. This is one of my pet peeves. Can no journalists be bothered to point out that the Community Bankers of America and the ABA are lobbying groups? They are hardly the place to go to get an objective read. You are sure to get the heaviest spin there. Lobbyists should clearly be branded as such. Back to the article:
Part of the problem for borrowers like Mr. Rusin may be that Congress restricted loan eligibility to companies that are simultaneously struggling yet viable. That means the business must face an “immediate financial hardship,” meaning a 20 percent reduction in a critical operating number, such as revenue.
But the company, which has to have been in business at least two years, also has to have shown positive cash flow, if not an actual profit, in one of the last two years. It also must do a two-year cash-flow projection to show it can repay all its obligations.
The effort required to verify all of this probably explains why those banks that are participating in the program are lending primarily to existing clients. “From a financial perspective, it really is a loan that makes sense for an existing customer,” Mr. Merski said. “You’re not going to have to put out a lot of resources to do a very costly underwriting. You know the business.”
Yves here. That explanation does make some sense….up to a point. Why shouldn’t a bank want to acquire new customers? That does cost money. You expect customer acquisition to be less profitable initially than an existing relationship. It is a spurious argument to say a new customer is less profitable than an existing one. So? You banks are telling the public you are against growing? Chase seems very eager to attract small business accounts. What do they see in them that you don’t?
That is what is troubling about this piece. We a formula for these stories. Sad anecdotes from struggling individuals or businessmen. Defensive “we are really on track” pronoucements from the officialdom. Industry lobbyists saying the program is stupid because anything that tries to make their industry change behavior is defined to be stupid. And there is no probing of the economics or the justification for the program’s shortfall.