Congress is considering the Federal Credit Union Act, S.2231, which would give small businesses access to much needed capital – approximately $13 billion in additional loans. This would be accomplished by raising the current cap on small business lending by credit unions from 12.25 percent to 27.5 percent, subject to safeguards and monitoring. Proponents of the bill have noted that 140,000 jobs would be created, and the cost to taxpayers would be zero.
Given the shortage of capital available to small businesses in the last few years, you would think that having more lenders, more capital and more competition is a good thing. “Not so,” says the American Banking Association (ABA), whose members account for the vast majority of small business lending. They estimate that only a fraction of the credit unions would see expanded small businesses lending if the bill were passed. They suggest that the bill not would accomplish enough in their view.
If the ABA is correct, then the organization’s opposition to the bill is quite nonsensical. Do you believe that the ABA is opposed to the bill because it provides too little benefits to credit unions? No — of course not. In fact, the ABA’s observation concedes the point that giving more help to the credit unions would be better.
I think there is some confusion here on the ABA’s part and I would like to clear it up.
Increasing the lending cap means more competition, greater choice, and increased access to capital. If the bill passes, this will mean new investment, not just replacing the investment source. There is plenty of pent up demand for capital as a result of very restrictive lending by banks. During the last recession, bank loans fell by the double digits, while credit union lending increased toward its cap. In 2011, banks denied 60% of small business bank loan applications. So the legislation would increase small business access to capital and increase market investment.
The reality is that banks oppose this bill because it increases market competition. Given the shortage of capital available to small businesses in the last few years, having more lenders, more capital and more competition is a good thing. Because credit unions are pretty good in managing risks and providing affordable loans, banks do not want the market competition – they want market protection. The reality is that heightened market competition would benefit the economy.
The ABA doesn’t like the bill, and that is precisely why the bill is a step in the right direction. It is as simple as that. It’s time to let the market work.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.