Increase Competition: A Gift Horse with Sound Teeth and Solid Performance

 

The economy expanded at a 1.8% snail’s pace in the first quarter of 2011.  The large auto companies and banks are still repaying Federal stimulus loans.  In April, just half of small businesses report making capital investments, depressingly low for a group that is usually first to recover and hire.  Among consumers, many homeowners are struggling with mortgages, and 9% of us remain unemployed.  Private sector stimuli that ignite economic activity are welcomed.

 

Fewer small businesses are looking for loans in the last few months because they don’t face demand that merits expansion.  Recently, in the Dec. 2007 to Dec. 2010 crisis, small business loans grew 38% at Credit unions, shrank 11% at small banks and shrank 20% at larger banks (per FDIC, NCUA and CUNA).  Credit unions hold a 5.5% share of the small business loan market.  But since money is the same money offered by all lending competitors, small businesses have shown they increasingly prefer credit unions’ service and rates.  It’s nice to see success in tough times, but a problem is brewing.

 

As of 1998, credit unions were saddled with a 12.25% limit on assets that can be loaned to businesses.  Some credit unions loan little to small businesses.  But of the largest, many loan between 7-10% of assets to small business, and in a year they will be hitting the 12.25% cap.  That’s a pity because credit unions have shown exceptional skill (compared to banks) in keeping losses low.  For example, their business loan net charge-off rate has averaged less than a quarter of bank’s 0.89% charge-off average since 1997.  Good loan revenues and low charge-offs are very good for the credit unions’ consumer members.  

 

If the cap were lifted to 27.5% as some suggest to accommodate eager small businesses, the Credit Union National Association estimates an additional $13B in loans would be made available for financing small business expansion – without government help.  As expected, the banking industry objects, hoping to protect its 94% share of small business loans.  But given the credit unions better record on loss ratios and growth during tough times, banks lack a persuasive argument to block the increase in credit unions’ small business loan cap.  The cap “lift” is a gift horse we should grab and ride.

 

Alan Daley is a retired businessman living in Florida.  He follows public policy issues from the consumer’s perspective.

 

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