United States. Congress. House. Committee on Small.

Small businesses' access to capital : the role of banks in small business financing : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Washington, DC, May 1, 1996 online

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6



SMAU BUSINESSES' ACCESS TO CAPITAL: THE
ROLE OF BANKS IN SMALL BUSINESS RNANCING



Y4.SM 1:104-78

Snail Businesses' Access to Capital...

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION



WASHINGTON, DC, MAY 1, 1996



Printed for the use of the Committee on Small Business

Serial No. 104-78



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U.S. GOVERNMENT PRINTING OFFICE
24-704 CC WASHINGTON : 1996



For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-053510-7



\6



SMALL BUSINESSES' ACCESS TO CAPITAL: THE
ROLE OF BANKS IN SMALL BUSINESS HNANCING



Y4.SI1 1:104-78

Snail Businesses' Access to Capital...

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS
HOUSE OP REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION



WASHINGTON, DC, MAY 1, 1996



Printed for the use of the Committee on Small Business

Serial No. 104-78





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U.S. GOVERNMENT PRINTING OFFICE


24-704 CC


WASHINGTON : 1996



For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-053510-7



COMMITTEE ON SMALL BUSINESS
JAN MEYERS, Kansas, Chair



JOEL HEFLEY, Colorado

WILLIAM H. ZELIFF, JR., New Hampshire

JAMES M. TALENT, Missouri

DONALD A. MANZULLO, Illinois

PETER G. TORKILDSEN. Massachusetts

ROSCOE G. BARTLETT, Maryland

LINDA SMITH, Washington

FRANK A. LOBIONDO, New Jersey

ZACH WAMP, Tennessee

SUE W. KELLY, New York

DICK CHRYSLER, Michigan

JAMES B. LONGLEY, JR., Maine

WALTER B. JONES, JR., North Carolina

MATT SALMON, Arizona

VAN HILLEARY, Tennessee

MARK E. SOUDER, Indiana

SAM BROWNBACK, Kansas

STEVEN J. CHABOT, Ohio

SUE MYRICK, North Cardina

DAVID FUNDERBURK, Nrath Carolina

JACK METCALF, Washington

STEVEN C. LaTOURETTE, Ohio



JOHN J. LaFALCE, New York
IKE SKELTON, Missouri
NORMAN SISISKY, Vii^inia
FLOYD H. FLAKE, New York
GLENN POSHARD, Illinois
EVA M. CLAYTON, North Carolina
MARTIN T. MEEHAN, Massachusetts
NYDIA M. VELAZQUEZ, New York
CLEO FIELDS, Louisiana
EARL F. HILLIARD, Alabama
DOUGLAS TETE" PETERSON, Florida
BENNIE G. THOMPSON, Mississippi
KEN BENTSEN, Texas
WILLIAM P. LUTHER, Minnesota
JOHN ELIAS BALDACCI. Maine



Jenifer Loon, Staff Director
Jeanne M. Roslanowick, Minority Staff Director



(11)



CONTENTS



Page

Hearing held on May 1, 1996 1

WITNESSES
Wednesday, May 1, 1996

Dowe, James, President, Bangor Savings Bank, Bangor, Maine, representing
America's Community Bankers 16

Glassman, Cynthia A., Ph.D., Managing Director, Furash & Company, Wash-
ington, DC 10

Hove, Andrew C, Jr., Vice-Chairman, Federal Deposit Insurance Corporation 4

Maltby, Sandy, Senior Vice President, Small Business Services, Keycorp,

Cleveland, Ohio 8

Suellentrop, Frank A., President, State Bank of Colwich, Colwich, Kansas,

representing the Independent Bankers Association of America 12

Yellen, Janet L., Governor, Federal Reserve System 6

APPENDIX

Opening statements:

Flake, Hon. Floyd H 33

Meyers, Hon. Jan 35

Poshard, Hon, Glenn 37

Prepared statements:

Dowe, James 38

Glassman, Cynthia A 45

Hove, Andrew C, Jr 53

Maltby, Sandy 73

Suellentrop, Frank A 95

Yellen, Janet L 112



(III)



SMALL BUSINESS' ACCESS TO CAPITAL: THE
ROLE OF BANKS IN SMALL BUSINESS FI-
NANCING



WEDNESDAY, MAY 1, 1996

House of Representatives,
Committee on Small Business,

Washington, DC.

The Committee met, pursuant to notice, at 10:05 a.m., in room
2359, Raybum House Office Building, the Honorable Jan Meyers
(Chair of the Committee), presiding.

Chair Meyers. Good morning. The Committee will come to order.

Our hearing this morning is the second in a series that this Com-
mittee is holding on small businesses' access to capital. At the first
hearing on February 28, we asked witnesses representing five
prominent small business advocacy groups to address the current
conditions and availability of capital for small business. We wanted
to know what specific obstacles and opportunities small business-
men and women face in this area.

Those of you who attended that hearing will no doubt remember
that much of the witness testimony and an even greater amount
of the discussion focussed on bank lending to small business. In
general, the witnesses pointed to the difficulties of securing small
business bank loans and the demise of community bankers, which
has led to weakening relationships between bankers and borrow-
ers, as well as a decline in so-called character loans.

The witnesses also noted that the high collateral and paperwork
requirements that banks demand from borrowers as well as various
other regulatory barriers present significant obstacles for small
businesses seekmg bank loans.

Our witnesses' statements were underscored by a recent article
in the March 14 edition of American Banker Magazine which cites
a Federal Reserve paper claiming that between 1989 and 1994
bank lending to small business dropped by 34 percent. The paper
also predicts a 32 percent drop over the next 5 years.

According to our witnesses, as a result of the declining role that
banks are playing in small business financing, many small busi-
nesses are turning to nonbank lenders and credit cards for their
capital needs. While these sources of capital are generally more ex-
pensive, they are also frequently more accessible.

As has been the case throughout this series of hearings, today we
will examine the private market rather than government-sponsored
sources of capital. There are indeed differing opinions with respect
to how best to increase small businesses' access to capital.

(1)



It is my personal opinion that when appropriate, the Government
should encourage private sector initiative in this area by removing
whatever obstacles and disincentives that exist for banks to lend
to small business rather than simply increasing the role of govern-
ment-sponsored capital sources.

I have asked the witnesses before us today to address the bank
lending issues raised by the witnesses at our first hearing. Specifi-
cally, I have asked the private sector witnesses to identify the var-
ious impediments or disincentives that banks face in lending to
small business. I have also asked them to assess how, despite these
impediments, certain banks have been successful in making small
business loans.

I have asked the regulatory witnesses to assess the overall regu-
latory climate for small business bank lending. Are conditions now
generally better or worse since the so-called credit crunch of the
early 1990's? In addition, I have asked them for suggestions to im-
prove small business access to bank loans. Finally, I've asked to-
day's witnesses to give us their opinions on the effects of industry
consolidation and competition from other capital sources.

It is my hope that this hearing will give us a more accurate pic-
ture of the current state of bank lending to small business and help
identify ways to improve small business' access to this important
source of capital.

At this time I would like to recognize the Ranking Member of the
Committee, the Honorable John LaFalce.

Mr. LaFalce. Thank you very much. Madam Chairman. I cer-
tainly want to thank you for conducting this morning's hearing.

The capital needs of small business and the role of financial in-
stitutions in meeting these needs are topics of great concern to me.
They're also issues that I've worked on extensively over the years,
both in this Committee, especially those years that I was chairman,
and in the Committee on Banking and Finance.

Over the past few years I've conducted many hearings to exam-
ine various aspects of the credit crunch of the late 1980's and the
early 1990's when most were saying there was no credit crunch,
but I was concerned the impact that credit crunch was having, es-
pecially on small businesses.

Now, I appreciate the opportunity to address the issues but I
think the focus of the hearing could be a little clearer. On the one
hand, the announced purpose of the hearing is to investigate the
issues raised in the February 28 Subcommittee field hearing in
Boston on the effects of bank consolidation on small business lend-
ing.

Certainly the presence of Governor Yellen of the Federal Reserve
Board and Vice Chairman Hove of the FDIC present the Commit-
tee with an opportunity to discuss how the cnanging structure of
our banking system may affect small business lending. The Federal
Reserve System in particular has produced several interesting
studies on bank lending and bank consolidation that are of signifi-
cant interest to me.

However, a review of some of the witness testimony and the
hearing briefing materials that were distributed earlier suggest
that rather than investigating key issues and data relating to com-
mercial bank lending to small businesses and the impact of bank



consolidation, which I think we should be doing, the purpose of the
hearing will be to focus in large part, once again, on the claims of
excessive Government regulation and paperwork, this time in
banking and financial services.

The absence of SBA's Office of Advocacy is also something that's
of concern to me because in each of the last 2 years, the Office of
Advocacy has produced the most extensive analyses of commercial
bank lending to small business by both large and small banks. Ad-
vocacy also has produced the best analysis of data from the Federal
Reserve and other sources on changing patterns of small business
lending. Perhaps they can be inviteof to some future hearing.

It's my hope that we will take the opportunity of this morning's
period, however, and hopefully some additional hearings, to exam-
ine and better understand how the changing structure of our finan-
cial services system and our commercial banking system in particu-
lar may be affecting the availability of credit for smaller busi-
nesses.

Study afler study has shown that commercial banks are by far
the single most important source of all forms of credit for small
businesses. While SBA figures show a slight increase in total bank
lending to small business over the past year, at least one study, a
very important study by Federal Reserve economists Allen Berger,
Joseph Scalise and University of Chicago economist Anil Kashyap,
estimates that bank lending to small businesses has declined by 34
percent since 1989 and is expected to decline an additional 32 per-
cent by the end of the decade.

Assuming the accuracy of this look-back and probable accuracy
of this look-forward, those would be very disturbing.

The study that I just referred to attributes this decline in small
business lending, at least in part, to the thousands of bank mergers
that have taken place since the 1980's. Since out-of-State bank
holding companies consistently show lower ratios of small commer-
cial loans to deposits than local independent banks, there's reason
to be concerned that further bank consolidation may continue to re-
strict small business lending. I'll be very anxious to hear the
thoughts of the panelists on this.

I believe the changing structure of our financial services industry
has far greater influence on the availability of small business credit
than any issue or problem of Government regulation and red tape.
The Committee on Banking considered regulatory reform issues at
length last year. The resulting regulatory relief bill includes some
very important improvements but it's now stalled, and for good rea-
son.

Despite complaints from the banking industry that excessive reg-
ulation was inhibiting lending to both consumers and small busi-
ness, manv of the legislative changes actually put before the Com-
mittee had little to do with reducing legal or technical impediments
or disincentives in current regulation or procedure. Rather, a num-
ber of the proposals within the regulatory relief bill sought to over-
turn many legitimate safety and soundness protections enacted in
the wake of the thrift crisis, to limit bank disclosure and liability
to consumers; most importantly, to cut enforcement of community
lending requirements under the Community Reinvestment Act,



something that would be anathema to the small business commu-
nity.

Despite broad bipartisan support for eliminating truly unneces-
sary and burdensome financial regulation, the chance for enacting
a meaningful financial services regulatory relief bill has been un-
dermined oy some of those extremist positions. I think there's con-
sensus on 90 percent of the bill. If we could just take away the ex-
tremist positions we should be able to sail the bill right through
the House.

In the meantime, I want to give a word of kudos to the regu-
lators. The regulators in the past few years have taken some very
meaningful steps to ease compliance and regulatory burdens on fi-
nancial institutions. Over the past 3 years we've seen far more sig-
nificant regulatory burden relief for banking institutions than in
any comparable period that I'm aware of.

banking supervisory agencies have eliminated or rewritten doz-
ens of regulations, simplified small bank examinations, revised and
simplified bank lending limits and capital calculations, reduced re-
porting and recordkeeping requirements and greatly simplified
CRA compliance. This effort has been substantial and it continues.

Unfortunately, effective regulation necessarily entails some
amount of compliance burden. We'll never eliminate that. We need
to review the regulatory framework to eliminate, though, any un-
warranted burdens. We also need to keep in mind the original mo-
tives of promoting bank safety and soundness and protecting tax-
payers and consumers.

I look forward to hearing from the witnesses. Thank you.

Chair Meyers. Thank you, Mr. LaFalce.

We have a distinguished panel with us today and our first wit-
ness is the Honorable Andrew C. Hove, Vice-Chairman of the Fed-
eral Deposit Insurance Corporation. Mr. Hove.

Mr. POSHARD. Madam Chairman, may I ask unanimous consent
to submit an opening statement for the record?

Chair Meyers. Without objection, so ordered. If there are others,
I would ask unanimous consent that all Members be allowed to
submit an opening statement. Thank you.

Chair Meyers. Mr. Hove.

[Mr. Poshard's statement may be found in the appendix.]

TESTIMONY OF THE HONORABLE ANDREW C. HOVE, JR., VICE-
CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION

Mr. Hove. Thank you, Madam Chair, members of the Commit-
tee. I'm pleased to have this opportunity to testify before you today
on behalf of the Federal Deposit Insurance Corporation on the
issue of credit availability for small business. With your permis-
sion, I will summarize my written testimony, which discusses re-
cent trends in small business lending, our analysis of the potential
impact on credit availability of increased consolidation of the bank-
ing industry, and the on-going efforts to reduce regulatory burden
by streamlining regulations and coordinating the supervisory proc-
ess.

When I last appeared before you in April 1993, the recession of
the early 1990's was ending and the FDIC had just begun to see
the first signs of increasing strength in the economy and increasing



demand for credit from households and businesses. At that time,
the banking industry was attempting to resolve the large number
of remaining troubled assets from the 1980's. Bank lending to busi-
ness had declined in virtually every quarter throughout the 1990
to 1992 period.

By the first quarter of 1993, however, the industry was well posi-
tioned to lend. Over 95 percent of the Bank Insured Fund-insured
banks were well capitalized. Liquidity levels were high and the
FDIC estimated that the industry as a whole could support asset
growth of $500 billion and still remain well capitalized.

Since my 1993 testimony, the banking industry has dem-
onstrated continuing strength. Commercial banks have attained
record high earnings and have maintained both high liquidity and
capital levels. Last year, commercial banks achieved record earn-
ings for the fourth consecutive year.

The improvement in the health of the banking industry over the
past 3 years has been accompanied by increased lending to small
businesses. Between midyear 1994 and midyear 1995 loans by
FDIC-insured commercial banks to small businesses and small
farms increased by $23.6 billion or 6.8 percent and smaller banks
with less than $300 million in total assets accounted for 42.4 per-
cent of that total volume of loans.

Given the important role that small banks play in extending
credit to small businesses and small farms, some observers have
expressed concern regarding the availability of credit to this sector
if industry consolidation trends continue. Banks with less than
$100 million in assets, however, remain the most numerous cat-
egory of institution. As of December 31, 1995, there were 6,659
commercial banks in this category, which held 22 percent of all the
loans to small businesses, even though they represented only 6.8
percent of the industry assets. They operate in over 4,000 cities
and towns in which there are no offices of larger banks, providing
essential financial services to consumers and businesses.

In 3 of the last 6 years, banks with assets of less than $100 mil-
lion were more profitable than the industry average, as measured
by return on assets.

Small institutions have demonstrated the ability to thrive in both
large and small markets. While smaller banks may not have the
financial resources to service major corporate customers to the
same extent as larger banking institutions, smaller banks have cer-
tain advantages in working with smaller, local businesses. Their
necessary focus on the local community has enabled small banks to
specialize in extending credit to small businesses and small farms.

Although the trend toward consolidation in banking appears like-
ly to continue, the data suggest that the smaller banking organiza-
tion focused on service to a particular local community and taking
advantage of competitive strengths resulting from that focus can
continue to prosper.

In addition to consolidation, regulatory burden can affect the
ability of banks, and especially smaller banks, to lend to small
businesses. In recent years, the regulatory agencies have taken nu-
merous steps to simplify and clarify supervisory policy and report-
ing requirements in an attempt to remove impediments to bank



lending that might occur due to necessary costs or supervisory bur-
dens.

When I testified before the Committee in 1993, the FDIC had
joined with other bank and thrift regulators in announcing a joint
program to address the problems of credit availability, especially
for small- and medium-sized businesses and farms.

The prog^'am addressed five areas: Number one, lending to small
and medium-sized businesses and farms; number two, real estate
lending and appraisals; number three, paperwork and regulatory
burden; number four, appeals of examination decisions and com-
plaint handling; and number five, examination processes and proce-
dures. Since 1993, the FDIC has addressed each of these areas,
which I describe more fully in my written testimony.

The reduction of regulatory burden imposed by unnecessary and
cumbersome regulatory requirements is critical to the ability of
smaller banks to compete effectively with larger banks and non-
depository financial comDanies. Regulatory relief is a major initia-
tive at FDIC.

In 1992, I directed a review of each FDIC regulation, policy
statement and program in order to identify and accelerate action
on initiatives that would eliminate any unnecessary burden or oth-
erwise promote economic growth. In addition, to implement the
Riegle Community Development and Regulatory Improvement Act
of 1994, the FDIC is currently reviewing 120 regulations and policy
statements. We're evaluating each of tnem to determine whether
they are necessary to ensure a safe and sound banking system,
whether they enhance the functioning of the marketplace and
whether they can be justified on strong public policy grounds relat-
ed to consumer protection.

In conclusion, I believe that the initiatives we have implemented,
taken as a whole, have created a climate that is more conducive
to lending and eliminated some misunderstandings that existed in
the industry. The relationship between increasing credit availabil-
ity and reducing regulatory burden, however, is an indirect one
that's not easy to measure.

Although it's almost impossible to isolate and allocate the im-
provement in the lending climate between reduced regulatory bur-
den and a generally improved economy, both factors have contrib-
uted to improving opportunities for small business lending.

I'll be happy to answer your questions. Thank you very much.

Chair Meyers. Thank you very much for your testimony, Mr.
Hove.

[Mr. Hove's statement may be found in the appendix.]

Our next witness is the Honorable Janet Yellen and she's a Grov-
ernor of the Federal Reserve System. Thank you for being with us.
Dr. Yellen.

TESTIMONY OF THE HONORABLE JANET L. YELLEN,
GOVERNOR, FEDERAL RESERVE SYSTEM

Dr. Yellen. Thank you, Madam Chair. I'm pleased to be here
today to discuss the environment for small business financing and
the role of banks in providing credit to small firms. My oral com-
ments will be brief and I'd ask that my longer statement be in-
cluded in the record.



I think we would all ag^ee that the financial environment today
is markedly improved from that of early 1993, when Chairman
Greenspan appeared before this Committee to discuss small busi-
ness credit. V^ile undoubtedly there remain pockets of weakness,
a wide array of statistical indicators suggest that access to bank
credit has eased appreciably for all businesses since that period.

Business loans at banks expanded rapidly in the last 2 years.
Small businesses participated in this expansion. Data collected
from banks in the June Call Reports revealed that small commer-
cial loans increased more than 7 percent between June 1994 and
June 1995. Roughly a third of the growth in small loans over that
period occurred at 7,000 mostly small and regional banks whose
business loan portfolios comprise only small loans. A good portion
of the expansion, though, was at large banks with more than $5
billion in assets.

While the growth in loans has been importantly demand-related
as the economy expanded, the willingness of banks to supply credit
also has been on the upswing. Continued improvements in bank
profits, healthy capital positions arid low delinquency rates on busi-
ness loans have encouraged banks to compete aggressively for busi-
ness customers.

Perhaps the most telling evidence of improved financing opportu-
nities are reports from small businesses themselves. Small- and
mid-sized firms surveyed by the National Federation of Independ-
ent Businesses had reported that interest rates and financing were
among their most pressing problems in the early 1990's. Only a
small percentage of firms cited this as a concern in recent surveys.
The Federal Reserve's National Survey of Small Business Finances,
which is highlighted in my written statement, quantifies the impor-
tant role that banks continue to play in small business financing.

Looking ahead, there are a number of developments in banking
markets that may be significant for small businesses. Perhaps the
most prominent is the on-going consolidation of the banking indus-
try, which some fear will have a negative impact on small business
lending. We are likely to see merger activity continue for a while
and inevitably some banking relationships will be disturbed when
ownership and management change. However, we would expect
these effects to be short-lived.

Analyses of banking markets over the years have provided little
support for the notion that when large banks enter a market they
drive out the smaller banks. Our staff studies have shown that
smaller banks typically perform as well or better than their larger
counterparts, even in markets dominated by large institutions.

Should large banks find it too costly to establish a lending pres-
ence in small business markets, perhaps because it's inefficient for
large, remote institutions to maintain close working relationships
with small customers, then other small banks in the area and new
entrants will be positioned to fill the gap. Indeed, there were many


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Online LibraryUnited States. Congress. House. Committee on SmallSmall businesses' access to capital : the role of banks in small business financing : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Washington, DC, May 1, 1996 → online text (page 1 of 11)