Be Careful When Crying Wolf

If you have a lick of sense and are in the banking business, you’ll be very careful about attacking small, well-behaved competitors.  The public has not forgotten the banks’ outrageous overdraft fees, the low account balance fees, scams surrounding foreclosures, the unwillingness togive mortgages, and the deeply resented TARP – almost a trillion dollars the taxpayer had to loan banks who had made dicey loans.  

Banks’ recent history of callous unfairness toward consumers undermined their credibility.  But now, they want us to believe that the well-behaved, tiny, local credit unions are a looming threat to the banks’ dominance in commercial loans.  They are complaining loudly that the Senate might pass S.2231, a bill that would allow credit unions to loan up to 27.5% of their assets to small businesses, gradually, and subject to careful staffing, monitoring, and other safeguards.

The banks’ complaint is a shameful fabrication; banks control 95% of the business loan market, and even the so-called “community banks” (banks with assets below $20 billion) control 58% of the small business loan market.  And it’s not just aggregate market share; the average credit union has assets of $122 million and the average bank has $1.8 billion in assets – it’s the difference between a hamster and a hippopotamus.   The hippos have nothing to fear.

Hoping to add a little credibility to their whining, the banks dragged in Fitch, a European ratings agency.  Fitch is paid to do ratings work by 3,500 banks, but it failed to foresee the banks’ U.S. mortgage crisis that led to TARP.  Fitch was just as myopic as S&P, Moodys, and the banks themselves.  In its press release on credit unions loaning to small businesses, Fitch admitted it rates no retail credit unions, and that it was relying on what the bank lobbyists told it.  Fitch then added something diffuse concerns about commercial loans adding to “risk.”   But Fitch did not dig very deeply.  It failed to mention that the business loan loss ratio at banks is three-times-higher than the loss ratio at credit unions.   So much for Fitch’s opinion on “risk.”

S.2231 is tailored to add a little competition for small business loans.  It builds on what has been a successful and prudent loan practice by credit unions over many decades.  The Senate can safely pass it.   The banks, credit unions, and small businesses will all survive quite nicely.

Alan Daley is a retired small businessman who writes for the American Consumer Institute

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