Warren Stephens’ commentary on “How Big Banks Threaten Our Economy” (WSJ, Opinion, April 30) discusses systemic banking risks and states correctly that “we should promote competition and innovation in the financial industry, not protect an oligopoly.”  However, he misses an important and timely example of how rules are set in favor of banks over potential competitors.

Today, banks have a 95% share of business lending, despite a significant drop-off in lending to small businesses.  Last year, banks rejected 60% of small business loan applications, and they reduced small business loans by 20% during the last recession.  On the other side, credit unions increased loans by 40% during the last recession, but their lending has been capped by an outdated law that suppresses small business access to capital and deters smaller credit unions from serving these businesses. 

To improve small business access to capital, Congress has proposed to increase the current credit union lending cap from 12.25% to 27.5% of assets.  For small businesses, which typically account for 60-65% of job growth in an economic recovery, increasing access to capital would mean investment and growth.  In fact, the proposed change would generate $13 billion in investments and create 140,000 new jobs, as well as indirect economic benefit.  On the other hand, keeping the cap in place maintains an economic barrier to entry that protects near-monopoly status for banks that collectively control the small business lending market. 

Warren Stephens is right in that we need public policies that encourage competition.  In this case, we need to remove market entry barriers that suppress small business lending.  Ending these market barriers would increase competition and stimulate economic investment, and do so without increasing government spending. 

Steve Pociask is president of the American Consumer Institute Center for Citizen Research, an educational and research organization.