United States. Congress. House. Committee on Small.

The effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 online

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Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 11 of 21)
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FEDERAL RESERVE BANK OF BOSTON

BEFORE THE

SUBCOMMITTEE ON TAXATION AND FINANCE

AND THE

SUBCOMMITTEE ON GOVERNMENT PROGRAMS

OF THE

HOUSE COMMITTEE ON SMALL BUSINESS

REGARDING

THE EFFECTS OF BANK CONSOLIDATION ON SMALL BUSINESS LENDING"

FIELD HEARING IN
BOSTON, MASSACHUSETTS

MONDAY, MARCH 4, 1996



102



Good day.

My name is Frank Romano. I am President and CEO of Elder Living Concepts,
a small health care and assisted living provider, headquartered in Rowley, Massachu-
setts.

I am here today as Chairman of the Bank Relations Committee of the Smaller
Business Association of New England (SBANE), a 2,000 member trade association
deeply concerned about the impact of current bank lending practices on our business
community. However, I am also here as a small businessman, with my own
experiences and thoughts on this important subject, which I wish to share with you
now.

I will give a brief summary of my prepared statement. But I do ask that my
written statement be part of the record.



Mr. Chairman, Mr. Meehan, other members of this distinguished panel, I
appreciate this opportunity to testify before you on bank consolidation and its impact
on small businesses.

Let me summarize my testimony. I will describe the climate in which small
business finds itself during this time of bank consolidation, and conclude with five
recommendations for your consideration to provide small businesses with a stable
economic climate.

Small business loans have become harder to come by in this age of bank
consolidation - despite what may be the best intentions of our larger banks. They seem
to talk the talk. But they are not walking the walk.

A growing number of reports and studies - starting with the SBANE Business
Barometer Survey in April, 1995; The Federal Reserve Bank of Boston's Small
Business Credit Availability report, issued at the same time; through a series of articles
in the Wall Street Journal, written by Michael Selz; to the recent report on small
business lending by Peggy Gilligan in New England Banking Trends - confirms this
alarming trend.

Indeed, just a little over two weeks ago, The Boston Globe reported on another
disturbing trend. Given the growing mountain of data that the big banks are not
pushing small business loans, the article, by Globe staff writer Alex Pham, reports that
the state's three biggest banks are developing a strangle hold on deposits, thus
squeezing the lending capacity of the smaller banks - those whose staple business has
been small business lending.



103



[fbig banks aren't loaning to small business, and the smaller banks on whom
small business relied can no longer meet this demand for loans, the question is:

Who will make those loans? Small business is this nation's number one
employer and job producer. In this region, they're our economic engine - if it isn't well
tuned, there will be no expansion of the economy.

Consider also the wider implications of a weakened small business community
in the context of global competition and business downsizing. Our stiffest challenge
as a nation is coming from foreign competitors - Japan, the Pacific Rim. Germany -
demanding that we use every weapon we have, efficiently and effectively.

Likewise, downsizing presents us with another challenge - and opportunity - to
take advantage of the growing number of highly skilled, pink-slipped workers who may
be our next generation of small business entrepreneurs.

But before we consider solutions to the problem, let me define the problem as
best I can, as well as our attempts to substantiate the current, harmful trend away from
small business loans.

In 1993, banks were required for the first time to include information about
business loans up to $1 million in their June reports to the Federal Deposit Insurance
Corporation. Such a requirement provides a tremendous helpmate in tracking lending
practices in the banking community.

The impetus for this small business loan disclosure rule, in large part, was due
to the efforts of SBANE. And armed with this information, SBANE- began its' own
review of bank consolidation in New England.

The result was the SBANE Business Barometer survey in early 1995. which
attested to the anxiety in the small business community over bank consolidation. Asked
the question, "Will bank consolidation make it more difficult for smaller businesses to
obtain bank financing?" Fifty-six percent of the respondents said it would. Only 20
percent disagreed.

Shortly after the release of the survey results, the Federal Reserve Bank of
Boston moved toward quantifying this sentiment in a report written by Joe Peck and
Eric S. Rosengren. entitled. Small Business Credit Availability: How Important is Size
of Lender?



104



While suggesting that small business lending may be a profitable venture for the
big banks, the authors state that "the move toward large consolidated institutions carries
some risks for bank-dependent borrowers. Banks engaged in acquisitions in New
England have not fostered the small business loan segment of the market."

More to the point, the authors summarize that their study "indicates that most
acquisitions by larger banks actually result in a shrinkage of small business loans.

Small businesses do not go to the public market to raise money. No commercial
paper is issued - no stocks and bonds. Necessary funding generally comes through
retained earnings and small business.

And those loans are dependent on intangibles - like character, the relationship
between people, banker and businessman - that are known by neighborly smaller
banking institutions, but undetected by the giants. In a healthy environment, people
count more than paperwork.

But today as consolidation increases its pace, smaller banks are beginning to
disappear, leaving a gaping void.

Big banks - because of any number of factors, from the profitability of the small
business market, or lack thereof; to the distance between the institution and the small
business borrower - aren't meeting this critical need for capital. Despite claims to the
contrary, big banks are falling short of their claims. In an important Wall Street Journal
article on the failure of big banks to be responsive to small business needs, the author,
Michael Selz, addresses the reluctance of big banks to lend to small businesses,
speaking of the distance between the lender and the borrower that did not exist in the
community environment of smaller banker and small businessman.

Just recently, Ms. Gilligan, in her blockbuster study, underscores the concerns
confronting me and my colleagues in the small business community today. Entitled
"Small Business Lending," that appeared in last quarter's New England Banking Trends,
the report points to the importance of the small business community to regional
economic growth, and the threat posed by consolidation to the small business sector.
Her study reports that, for the three years reviewed, "the small business loan share of
total business loans was lower in New England than in the nation in each of the three
years studied."



105



Let me read her conclusion:



"Two regional trends - the trend toward bank consolidation and the trend away
from small business lending at large banks - suggest that the small business lending
niche will increasingly be filled by banks with assets under $1 billion.

"With the regional economy expanding at a modest pace, these banks are
meeting the demand for small business loans. It remains a question, however, whether
these banks have the capacity to meet small business loan demands as further bank
consolidation takes place and/or the pace of economic expansion quickens."

What, then, to do?

Let me conclude with five steps that can lead the small business community
back to a stabling lending environment.

First, prevent the repeal of the small business loan disclosure requirement for
loans up to $1 million.

If this appeal is enacted, the growing impersonality between banker and
businessman is further exacerbated. Mr. Robert Berney, Chief Economic Advisor in
the U.S. Small Business Administration, has said: "Reporting this kind of data is the
only way to know which banks are willing to meet the credit needs of small business."

I would urge members of this panel, in bi-partisan spirit, to defeat any legislation
calling for this repeal.

Second, require in the Community Reinvestment Act, that banks do not reduce
the amount of small business lending.

It seems to me that this kind of acknowledgement of the business of banking on
the business of the nation is long overdue.

Third, encourage larger banks to establish small business lending groups or
departments.

Such quasi-autonomous entities promise to make small business lending by large
banks a more profitable endeavor.,



106

Fourth, expand SBA loan guarantees beyond the current $750.000 threshold.

And, finally, increase the number of bankers approved by the SBA to be direct
lenders.

Mr. Chairman, the subject matter of this hearing transcends the banking sector
and the small business community. In some respects, we are in a world war, and
economic conflict with ravenous industrial and high technological competitors. Our
edge has always been innovation and entrepreneurship.

Only through such steps as those I have recommended can we ensure that we
do not disarm the nation's most important economic weapon: Small Business.

Thank you.



Perspectives



107



Small Business
Lending



by Peggy Gilligan




ank lending to small businesses
in New England is an important
topic for several reasons:

• Small and medium-sized firms predomi-
nate in our region, and their growth is critical to
regional economic expansion. These firms rely
overwhelmingly on loans from banks to finance
their growth.

At the same time, small business lending
is important to the health of many of New
England's banks, particularly the smaller ones.
Smaller banks often look to small business lend-
ing to build their loan portfolios and enhance
their profitability.

• Finally, there has been speculation that
the trend toward consolidation among banks
mav endanger small business lending.



For the past three years, banks have reported
on small business loans once a year in their June
call report. What is reported are business loans
under SI million, so that the size of the loan,
rather than the size of the borrower, is used to
define "small business lending." In this issue of
New England Banking Trends, we present newly
available data as of June 30, 1995, updating a
previous article on small business lending that
appeared in the fall 1994 issue.

Table 1 presents the growth in small and
large business loans at banks in New England and
the United States over the two years spanning
June 30, 1993, through June 30, 1995. Small
business lending increased a modest 2 percent at
New England banks in the more recent year,
following a 2.8 percent decline in the previous



Table 1

Percent Change in Business Loans at Banks in New England and the United States
for Years Ending June 30, 1994, and June 30, 1995





New England


United States




1993 to 1994


1994 to 1995


1993 to 1994


1994 to 1995


Total Bank Assets


7.6


4.6


8.9


7.1


Total Business Loans


3.4


6.3


4.8


10.4


Small Business Loans


-2.8


2.0


-0.5


7.5


Commercial and Industrial


-3.0


6.3


-2.0


5


Secured bv Real Estate


-2 7


-0.6


1.1


7.5


Large Business Loans


7.6


9.0


8.7


12.5


Commercial and Industri.il


10.7


13.3


9.2


16.4


Secured by Real Estate


1.5


-0.3


7.S


4.0



Fall 1995 New England Banking Trends 3



108



Figure 1

Percent Chance in Small Business Loans
vr New England Banking Oii




I 993-1 99



I 994- I 995



For each of the two time periods, adjustments are made to aggregate
banks into their respective holding companies and also for merger activity
and other structure changes that occurred during the period. For
instance, if a bank or bank holding company acquired a bank between
June 30. 1993. and June 30, 1994, the 1993 figures for the acquiring
bank or bank holding company are adjusted to reflect the acquisition.
Likewise, de novo institutions not present at the beginning of the period
are excluded from the percent change calculation. Asset-size categories
are based on the merger-adjusted asset size of the bank holding
company or bank as of the beginning of eacn period



year. Small business loans secured by real estate
continued to decline in 1995, but more modestly,
at 0.6 percent, while small commercial and indus-
trial loans showed renewed growth of a respectable
6.3 percent. In both years, the growth in small
business loans that was seen in New England lagged
the growth seen in New England in large business
loans and the growth seen nationwide in both small
and large business loans. Nationally as in New
England, growth in large business loans generally
outpaced growth in small business loans.

As a result of these growth differentials, the
small business loan share of total business loans
declined both in New England and nationally
berween mid-year 1993 and mid-year 1995. In
New England, the decline was from 41 percent to



37 percent; nationally, the decline was from 43
percent to 40 percent.

Interestingly, the small business loan share
of total business loans was lower in New En-
gland than in the nation in each of the three
years lor which we have data. Unfortunately, we
do not have the historical data to tel I whether the
lower share in the region is long-standing or is a
result of the severiry of the real estate downturn
in New England.

Figure 1 shows the growth in small business
loans at New England banks over the years
ended June 30, 1994, and June 30, 1995, by
asset size of the banking organizations. Clearly,
the_region's smallest banks are aggressively pur-
suing small business lending, reporting the sharp-
est increases for both time periods. At the same
time, it appears that the region's largesr banks
are much less interested in small business lend-
ing. Besides these extremes, an interesting fea-
ture of the chart is the behavior of banks with
assets of S300 million to Si billion. Banks in
this asset-size category posted the sharpest de-
cline in small business lending in 1994, 7.6
percent, and then went on in 1995 to record a
subsrantial 7.8 percent increase.

Table 2 presents the growth in business
loans at New England banks by asset-size cat-
egory from June 30, 1994, to June 30, 1995.
Growth in business lending over this 12-month
period varied widely across the different asset-
size categories. Small business loans declined by
5.3 percent at New England's largest banks,
while these eight institutions increased their
large business loans by a strong 11.4 percent.
Like Figure 1, Table 2 shows that banks with
assets of S300 million to Si billion focused their
lending efforts on the small business sector in
1995. While reporting an increase of 7.8 per-
cent in small business loans, they reported a 4
percent decline in large business loans.

As Table 2 shows, in the year ended June
30, 1995, banks in all asset-size categories ex-
cept one posted an increase in small business
loans secured by real estate. The exception was
the eight largest banks, which reduced their
loans of this type by 14.6 percent. This decline



4 New England Banking Trends FalM995



109



Table 2

it Change in Bi , by Size of New England Bani nations

[i m 30. 1994. to June 30, 193



S 1 B.IIk
S5 B.ll



S300 Million StOO Millii
to SI Billion S300 Mill



Undc
100 Mil



Total Business Loans

Commercial and Industrial
Secured by Real Estate

Small Business Loans
Commercial and Industrial
Secured by Real Estate

Large Business Loans
Commercial and Industrial
Secured bv Real Estate



13.1


17


6.3


i: 7


9.2


-4.4


-1.4


3.2


5.6


10.4


-5.3


0.5


7.8


8.2


13.2


5.6


-1.4


10.2


14.2


9.8


14.6


1.6


6.9


6.0


15.1


11.4


-0.6


-4.0


2.9


-31.1


14.4


4.6


-6.5


2.4


2.2


2.0


-5.0


-3.4


3.1


-53.7



Number ot Banks



69



149



overwhelmed the 5.6 percent increase that the
largest banks posted in commercial and industrial
small business loans.

Although the region's largest banks have te-
duced their small business lending, as of June 30,
1995, they still held the largest share of small
business loans in rite region. As Figure 2 shows,
their share was 35 percent, down from 37 percent
one year earlier.

Conclusion

Two regional trends — the trend toward
bank consolidation and the trend away from
small business lending at large banks, as evi-
denced by the latest data — suggest that the small
business lending niche will increasingly be filled
by banks with assets of under SI billion. (The
trend at banks with assets of Si billion to $5
billion is not clear.) With the regional economy
expanding at a modest pace, these banks are
meeting the demand for small business loans. It
remains a question, however, whether these banks
— which hold just 28 percent of banking industry
assets and 31 percent of bank capital — have the



Figure 2

Distribution of Small Business Loans at New England

Banking Organizations, by Asset Size,

as of June 30, 1995




capacity to meet small business loan demand as
further bank consolidation takes place and/or the
pace of economic expansion quickens. Kl a; m



Fall 1995 New England Banking Trends 5



110



THE WAU, STREET JOURNAL



Truth in Small-Business Lending:
Big Banks Fall Short of Their Claims

By Michael Selz

Staff Reporter of The Wall Street
Journal

04/17/95

WALL STREET JOURNAL (J), PAGE 31

To prove its commitment to small-business lending,
New York's Chemical Banking Corp. annually stages what
it calls the "biggest blitz in banking history. "

In each of the past three years, more than 1 ,000
officers of the nation's third largest bank holding company -
- including its chairman and chief executive. Walter V.
Shipley - go "knocking on the doors" of prospective small-
business borrowers in five states to make clear that
Chemical wants to lend them money

When it comes to small-business lending in the New-
York area, "we're the market leader," says Frank Lourenso.
an executive vice president for Chemical's New York bank

There's one problem with that claim Federal banking
reports show it isn't true.

In June 1994, Chemical Banking's big New York bank
had $740 million of outstanding small-business loans -
about 33°'o less than the nearly S 1 . 1 billion of such lending
by the New York unit of far smaller Bank of New York
Co , according to data filed with federal regulators.
Citicorp, the nation's largest bank, also beat Chemical.

Big banks that bill themselves as friends of small
business don't always come through with the most cash,
according to an analysis of federal reports of all commercial
banks' small-business lending activity by The Wall Street
Journal The data were filed by the banks for June 1994
under a two-year-old federal rule.

Ads for Pittsburgh's Mellon Bank Corp assert that
lending to small businesses "is just our way of putting our
money where it counts." But last June, Mellon' s main
Pennsylvania bank had only $785 million in small-business
loans, or S"'o of its total domestic business lending. The
main unit of Pittsburgh rival PNC Bank Corp had $1 6
billion in small-business lending — 16% of its domestic
business loans.

"There are banks of all sizes out there that say they're
makine a lot of loans and aren't," savs Jere Glover, chief



counsel for advocacy at the U S Small Business
Administration

Indeed, big banks provide only a tiny fraction of
financing for many small businesses, because these
businesses often lack the track records, assets and
documentation — like audited financial statements and
reports — required for a business loan. And it's more
efficient - and less costly - for 3 bank to make a few big
leans than many little ones, because small-business loans
require greater analysis and monitoring Small companies
frequently patch together alternative funding: personal
loans from fnends and family, home mortgages and credit
cards

But big banks have ample incentive to lend to small i
firms Loan demand among traditional corporate customers
has been declining as more companies turn to Wall Street
for financing. And a bank's investment in the community -• 1
including lending to small businesses - is increasingly a '
factor in regulatory approval of mergers and acquisitions. I
Even so, many large lenders are still mainly paying lip
service to the small-business market, analysts say. .Among
banks that have tned to reduce the higher nsk and cost of I
small-business lending, the results have been "mixed, at I
best," says John Hagen, a financial-services consultant in I
the Boston office of KPMG Peat Marwick "I know of
banks that have changed their strategy three times in three
years "

To Ray Rivera, a small-business owner whose loan I
application was rejected by Chemical last year, the big
banks' marketing claims seem deceptive "They advertise
that they want to give small business a chance, but they
didn't," says the owner of Advanced Drywall & Ceiling
Systems Inc in Edison, N J.

Mr. Rivera says he was optimistic when he applied I
last September for a loan of up to $100,000 at a downtown
Manhattan branch, where he had been banking since 1 992. [
.After all, he says, he had seen and heard Chemical's small-
business marketing campaign featuring Tom Seaver, the
former Mets hurler who is "back on the mound - pitching I
for Chemical."

But six to eight weeks after applying for the loan - I
and dealing with four bank representatives in three offices -
- Chemical told Mr. Rivera that its New York bank couldn't
lend money to a New Jersey company It referred him to its I
East Brunswick, N J , unit

Infuriated. Mr Rivera moved his banking business to i
a small community bankwhich hasn't acted on his
application



ow Jones



For additional searches, call SO0 759 2797



Copyright £ 1 995 Dow Jones & Company Inc.



Ill



"We wasted weeks of Mr Rivera's time, and we
apologize for that." says a Chemical spokesman, adding
that Mr Rivera should have been referred to its New Jersev
bank immediately "There's absolutely no excuse for what
happened. "

Two years ago. banks were required for the first time
to include information about business loans of up to SI
million in their June reports to the Federal Deposit
Insurance Corp , called federal call reports Banks that were
exaggerating their small-business performance "saw the
federal call reports and said, Oops"" says Tern Dial, an
executive vice president at Wells Fargo i Co in San
Francisco.

Citicorp, for example, promotes its Xew York
subsidiary as a bank with "big ideas for small businesses."
Yet in June 1994, the holding company had SI S billion in
small-business loans on its books That's 22% less than the
S2 3 billion of such loans 3t First of .America Bank Corp
of Kalamazoo, Mich., which has one-fifth Citicorp's total
domestic assets

Citicorp initially suggested that its numbers were
relatively low because most of its small-business lending
outside Xew York is through thrifts it owns But regulatory-
filings show even its largest thrift had negligible small-
business lending The bank conceded it only recently began
focusing on the small-business market

Some big banks say they couid do more "Our
approach to the business hasn't been dynamic enough." says
Greg Rotella. 3 senior vice president at New York's Chase
Manhattan Corp In mid-1994, small-business loans
accounted for less than 10% of its S9 4 billion in domestic
business loans

The call report data is disputed by some bankers, who
claim it understates their lending activity - even though the
banks are providing the numbers For example, Douglas
Freeman, head of corporate banking at Barr.ert Banks Inc
in Jacksonville, Fla., says of his bank's report "It's not
right. We have well over SI billion in small-business
loans "

According to its federal call reports, Bamett's entire
commercial banking operation made fewer small-business
loans than each of two smaller Florida units of Charlotte,
X.C . banks Bamett in June 1994 had S505 million in such
loans, while First Union Corp 's Jacksonville subsidiary
had S2 4 billion and NationsBank Corp 's Tampa bank had
SI 1 billion m small-business loans

Others have tried to use the filings to their advantage.


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Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 11 of 21)