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 4 of 21)
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Equipment, or it could be the next IBM, or it could be the next
Microsoft, from your home State, Madam Chairman.

The question is, how do you know whether or not that company
is, in fact, going to be that entity. If only the bank would give more
money. We have all wrestled with this. The question is, trying to
bring together pools of money that are of different types in order
to give those companies a chance to get to the next plateau.

It's not a straight bank loan, no matter how good the character
is, no matter how worn the plumber's hands are. It's not about
that. It can't be just a straight loan, but it can be a combination
of funds coming from banks, coming from guarantee funds put up
by either SBA or State funds. It can be a local fund that has been
funded by a consortium,. We need to cobble together sources of



23

money before those companies can get to the equity markets and
to the venture capital markets.

Joyce Plotkin, who's here representing the Software Council, and
I have talked about it, others have talked about it, how we put that
combination of funding. That, I think, is critical for all of us, be-
cause could be the next Microsoft. We want that customer to be our
customer.

If that can be defined well, I think that is where the home runs
come. Having good decisionmaking in that process is what will
make a big impact on the economic well-being of the region and the
country. Because we are going to take care of the small business
borrower who comes in and is the everyday small business bor-
rower. They're not going to get away from us. But it's that
Microsoft of tomorrow that we want to make sure that we're able
to hit.

That's where this Subcommittee, I think, can do enormously good
work to flesh that out, to try to find how do we define that and
what are the pools of money and where is it that the cooperation
can come about so that it's not just about, "Gee, if the bank would
only make a loan." That's too simple an answer, or if it's, "If only
the venture capital" — that's too simple an answer. It's not really
the right question.

Mr. Zafris. Although I share Mr. Gallagher's feeling about the
sort of regulatory paralysis that's being imposed on banks, I really
don't have any problem in our sized bank with providing the kind
of information that you referred to and don't find it a burden to
making loans that we're making to small companies.

Mr. Meehan. My interest, obviously, is just figuring out a way
to make a determination. There are a lot of facts and figures out
there. But overwhelmingly, I think, all of us up here agree that 60
to 70 percent of the job growth in this region's going to come from
small companies. I hear from them oftentimes talking about the
difficulty of credit availability.

Then when we get to the whole issue past that, the venture cap-
ital, the question is, how do we get venture capital to be patient.
Maybe we do that by cuts in capital gains that are targeted. But
in any event, the question is, how do Members of Congress make
that determination.

Chairwoman Smith. You see, we do agree on that topic.

Mr. MEEHAN. Targeting the capital gains. Now, our retroactive
capital gain

Chairwoman Smith. Mr. Torkildsen?

Chairman Torkildsen. Thank you, Madam Chair. Just to follow
up in that same vein it's comforting to know that the banking com-
munity is not a model of opinion any more than either of the major
parties. It's nice to have some honest disagreement from the panel
here today.

For any of you, does the increased regulation of the banking com-
munity play a role at all in your decisions in lending for small busi-
ness? Has it hampered it? Has it made no difference at all from
your perspective? Could you comment on that? Because clearly,
with the bank failures which were, as everyone knows, more in
savings and loans, but because of that, an effect has been much
tighter regulation of the banking community in general.



24

Then as a second part of the question, a point David Aloise
brought up, the role and effect of nonbank competitors — I mean,
the banking business is very different nowadays. You can receive
a lot of the services that you used to receive from a bank from dif-
ferent, very specific types of competitors which don't face the regu-
lation that the banking community does. Is that a factor? Does that
make it more difficult, less difficult?

At least at this point in time, I'm not aware of the studies done
in New York. The Boston Feds actually took that into consideration
as a separate entity. Could any of you comment on those two
points, regulation and nonbank competitors?

Mr. Morison. In terms of regulation, the issue isn't whether reg-
ulation turns a bank away from a particular market. It's a function
of imposing an increasing cost on the organization to comply with
the regulations which reduces the competitiveness of that organiza-
tion relative to other capital providers.

This is an intensively competitive business, both on the side for
deposit gathering as well as the side for lending. Anything you do
to impose additional costs on The First National Bank of Ipswich
means that we become less competitive in fighting for our market
share. So, I think regulation is an issue of cost and resource alloca-
tion, not something tnat steers you to or away from the market.

I said in my verbal remarks, as well as in the paper I submitted,
that nonbank competition is increasingly pervasive and increas-
ingly difficult to deal with, because they do have a cost advantage.
One, they aren't regulated. But second, nonbank competitors tend
to be large and, therefore, have the inherent efficiencies that larger
corporations can develop in their distribution capabilities.

Nonbank competition is as prevalent in Ipswich as it is in Bos-
ton. Our customers are getting letters from Merrill Lynch all the
time, from the Money Store, from major credit card companies that
are issuing business credit cards as opposed to consumer credit
cards. Wells-Fargo is a bank, but it has entered into a direct mail
national small business marketing campaign. It's a large organiza-
tion which, in fact, may be more efficient than we are.

One of the problems that we deal with here and in other parts
of the country, credit unions which have tax exempt status. All of
these things are bumps in an unlevel playing field. If, in fact,
small, independent locally owned banks are going to be an impor-
tant part of this economy going forward, that level playing field has
to be created and regulatory burden reduced to help drive competi-
tiveness and survival.

The concern that banks and regulators have with new and start-
up companies as being riskier — which they are — tends to, it seems
to me, create a subtle negative atmosphere for small business lend-
ing because banks do not want very many classified credits in their
portfolio. Many of the loan officers will tend to say, "Why should
I do it?" rather than, "How can I do it?"

I think we need a regulatory environment where there is a little
bit more sympathy for the situation and where judgment is also
taken into consideration.

Mr. Morison has described the outside competition, and I think
it includes credit unions, which certainly have a major tax advan-
tage over those of us who do pay taxes and yet seem to be able to



25

compete for precisely the same market that we're competing for. I
think if we're going to have a reasonably level playing field, there
should be some scrutiny into their role in the future.

Mr. Morison. I just have to add one thing. I was walking over
to the consumer side of the branch of the main office probably 6
months or a year ago, and I happened to see a husband and wife
sitting there opening up a savings account. So, I just sort of stood
by the side to watch the process and how it was unfolding.

They were talking about which kind of account they wanted and
finally settled on a pass book savings account and went through
the process of doing the signature cards. Then all of a sudden, the
printer behind the customer service rep's desk starts whacking
away, and this long document comes spewing out of the printer be-
hind her. She turns around, takes it off the printer, presents it to
the couple, and said, "I would like to take you through this disclo-
sure."

Now, this is a federally mandated disclosure under Truth in Sav-
ings. It's 8V2 by 14 inches long in very small type. The gentleman
kind of looked over to me, and he went — he was just nonplussed,
because he had no idea what to do with this disclosure. The regu-
latory burden under which we exist includes a lot of things like
this that have no real value to the consumer but create cost on the
organization which affects our competitiveness.

Mr. Meehan. When I used to do bank closings, I used to go
through this. When I was a lawyer, I would blame the Congress
all the time for disclosures. Now I think back on that saying, "I
could have worded it a little differently."

Mr. Aloise. At this point in time, I think as banks, we're some-
what fortunate that the nonbanks haven't really become a major
force yet. They have just begun but are becoming a factor for the
future. I think over time, regulation can have the effect of limiting
the banks in terms of being competitive, in terms of giving cus-
tomers what they want, and, in fact, by pushing costs up on both
the customers and the banking industry.

There's no question in my mind that that can happen. You heard
one example here from Lin. It happens on the credit side and the
noncredit side. Where we get into trouble is when regulation
doesn't tie to what's good, common sense either for the customer
or the bank and/or that regulation is enforced by an authority to
an extreme, which we have seen in the past.

Clearly, I think more regulation will mean more cost. It certainly
is not what the customer wants. Yes, they want protections, but
they don't want it to the point where it impedes their ability to do
business with us or raises their costs. I think over time, the
nonbank community can clearly make this a weapon.

So, I would certainly ask that we really take a hard look at those
regulations, make sure they're sensible and protect everyone's in-
terests, but not to the point where they're beyond common sense.

Mr. Gallagher. I would just add to the wisdom of my colleagues
on the panel that the question that you need to ask in Congress
is, "Is this regulation or is this law required for safety and sound-
ness?" because you have to establish that base.

But I think in today's competitive world, as is pointed out by the
question asked, safety and soundness also means the ability to



26

compete and the ability to compete with efficiencies that allow you
to deal with the competition from much more efficient markets.

So, now, safety and soundness is a new issue. It's not just have
you got walls and protections. Have you got the capacity to com-
pete? Have you got the flexibility to address customer needs in an
efficient way so that they'll use your bank? Have you got a diver-
sity of products and can you deliver those products efficiently?
Those are the questions that are much more important than have
we built a high enough wall and a thick enough wall and have we
got enough regulatory burden.

That's why your role in Congress is so critical to preserving the
banking system if, indeed, you believe as we all do that the bank-
ing system is essential to the success of small business and small
business is essential to the success economically of our community.
It's that new and more complex focus that I think is necessary.

I think it's being done well in the Office of the Comptroller of the
Currency right now. It's a good place to look. States are trying to
do the same thing in order to maintain their own State controls.
But Congress has to do so, as well.

Mr. Hamill. Could I just make one final comment? The only
point I disagree with that was made is that I do not believe if
banks went out of existence today that the small business market
would not be well served. As has been discussed, we already have
many who are involved in trying to get into that market.

The nonbank would love for more regulation of banks to come out
and more restrictions to come out, because the more that that can
happen, the more likelihood it is that banks will say, "It's too ex-
pensive to serve that small business market." And you'll have
banks exiting the market, leaving.

Banks that are like ours that are trying to stay in that market
by driving the costs down as nonbank competitors are already
doing.

Thirty years ago, I'm sure there was testimony before Congress
that savings banks are vital to the continuation of the home mort-
gage market in the country. Thirty years later mortgage companies
have become a dominant force in the home mortgage business. So
too, I think what we're really talking about here is the question of
whether or not there will be something else other than a bank
serving this small business market. The answer is clearly yes, be-
cause you can make good money. Don't drive out the banks by over-
regulating them.

Mr. Gallagher. I would just like to add one thought to that, be-
cause I think it is critical. That market will be served, but it will
be served with credit as a pure commodity. It will be served in a
homogenized way. It will be served by secondary market types of
loans that will detract from the creativity and the innovativeness
that small business really needs.

Those folks in the garage who really need that loan, they need
somebody to come in and bring the added value of their skills and
knowledge to the process. It won't always be done a large bank. It
won't always be done by a small bank. But it won't be done at all
by large nationwide offerors of credit who are selling off loans in
^o^ndary markets.



27

Chairman Torkildsen. Thank you. I would like to continue on
this, but for time restraints, we cannot. So, I would just ask — in
thanking all of you for your responses, if you would be available
to respond in writing if other members of the Subcommittee or my-
self have any additional questions.

Chairwoman Smith. Thank you, gentlemen. You have educated
me, and that is the focus of this Congressional hearing. You elect
us, but we really don't know everything. We just like to pretend we
do. Thank you. I'm sure I have additional questions. So, you will
get those once I finish them. Thank you.

If the second panel will come forward, we'll start in 5 minutes.

[Recess.]

Chairwoman Smith. Well, welcome back to the hearing again.
Our second panel will have a little more of a diverse background.
The first was mainly, as you can see, banking. So, we had moved
to the second panel. At this point, I'm going to ask Mr. Torkildsen
to introduce the witnesses.

Chairman Torkildsen. Our first witness is Julie Scofield, Execu-
tive Director of the Smaller Business Association of New England,
which is located in Waltham, but this association applies to all of
New England. Welcome, Ms. Scofield.

TESTIMONY OF JULIE SCOFIELD, EXECUTIVE DIRECTOR,
SMALLER BUSINESS ASSOCIATION OF NEW ENGLAND

Ms. Scofield. Thank you, Congressman Torkildsen, Congress-
man Meehan, and Congresswoman Smith. It's a pleasure to be here
this morning. SBANE is a 1,500-member organization which, as
you suggest, has its members throughout the 6-State region, al-
though the highest concentration of it would be within about a 75-
or 100-mile radius of Boston.

So, that would comprise Rhode Island, Eastern Massachusetts,
and Southern New Hampshire for the greatest concentration.
Those businesses come from manufacturing service, technology, dis-
tribution kinds of businesses, most of them with 100 or well under
100 employees, all of whom value their relationship with their
banking institution very highly.

The nature of the organization is to be involved in advocacy
kinds of positions, as our presence here today suggests, but also a
very strong background in the education arena. Our role is to help
educate our members so that they can be better businesses. With
respect to banking, for the past 12 or 15 years, we have, for exam-
ple, run a dozen or so programs on how to manage your banking
relationship.

It is a better attended program when there are difficulties in the
economy and people feel a greater need to pay attention to that re-
lationship.

But it's just as important a program to us when times are good,
because it is our belief and it is our joint belief — our organization
as well as the major lending institutions that are also our mem-
bers — that by having good communication, a borrower can do more
to protect himself or herself in the future against any hiccups that
that company might go through and that that company is going to
be far better able to withstand future difficulties because there is



28

some depth of understanding to the assumptions upon which that
lending depends.

When we have had some difficulties in the economy as we did 5
years ago with the credit crunch, we once again chose a cooperative
solution to that and worked with our banks on what was called the
Willing Lender Program, where we identified individuals within
the bank who would take a personal look at what was happening
with that company and try to recommend solutions.

I raise those with you because all of the initiatives are the kinds
of things that depend upon, in fact, having a relationship with a
banker and that are the kinds of things that lead to the survey re-
sults that you've all read as conducted by our organization which
said back in April that 56 percent of our members were concerned
that bank consolidation was going to have a negative outcome on
small business lending and borrowing.

I think it's that relationship that they fear they may lose. While
we fully expect that the market will respond by private smaller or-
ganizations cropping up to come behind, there could be a lag in the
conversions of those and that that is what is feared most by our
members, that somehow, that relationship will be changed.

Now, through the course of our seminars, we know that the big-
gest pet peeve that small business has is when that lending rela-
tionship is changed. I know that many of the banks have taken
great pains to make sure that they disrupt as few of those loan offi-
cers and they try to keep them in the community and all of that.

Nonetheless, it's the small business community's fear that with
consolidation, you're going to see a greater turnover in the lending
officers, and that means the small business borrower has to start
all over again in educating that lender to the dynamics of that
business and that that puts in jeopardy business should the econ-
omy go into a slow-down or should they run into some kind of a
difficulty specific to that business.

What we see is a great — well, let me give you one other example
that I think is cause for concern. Prior to these hearings, our office
had been very quiet with respect to members' calling. We have
heard very little from our members that would suggest that we cur-
rently have a problem, which is very different from the environ-
ment that we were in about 5 years ago, where we heard signifi-
cant, very high noise levels from our members that there was a
problem.

But in consideration of these hearings, I did some calling around
and talked to some of our members and talked to other commu-
nities.

It's worth noting, I think, that the situation in Connecticut is one
where there seems to be a bit more pain, as it were, and that the
market given the general slow-down in the State of Connecticut
has been slower to respond in that area — and it's something that
I would recommend that you look at a little more closely to find
out if there's anything specific to that geography that tells us some-
thing about the future and something that we want to guard
against. In talking to those people, it was underscored for us that
the SBA loan guarantee has been one of the most important ele-
ments in issuing credit to small business and that your support of



29

that initiative is very important to our constituency. We would like
to see it maintained and strengthened.

I think in summary of where we are at, we have the highest en-
dorsement of the community banks and feel that not every commu-
nity is as well served as is those communities that have someone
like Lin Morison or Jim Zafris in their midst.

There are lots of smart lending institutions that are less sophisti-
cated about the requirements of the small business sector, and they
would all benefit by having the role model of those two individuals
present in those communities. We do look to those kinds of institu-
tions as paving the way for a future that will ensure an adequate
access to capital funds.

[Ms. Scofield's statement may be found in the appendix.]

Chairwoman Smith. Thank you. We will again wait for questions
until all the panel is done.

Mr. Meehan, would you introduce the next witness?

Mr. Meehan. Yes. Ginnie Allan is the President of the North
Suburban Chamber of Commerce, which is headquartered in
Woburn. The North Surburban Chamber is one of the largest in
Greater Boston.

In Massachusetts, Ginnie is one of the leading members of small
business and was very effective in mobilizing the small business
community to fight to keep Hanscomb Air Force Base here in Mas-
sachusetts open. So, Ginnie, we appreciate your efforts for small
business on the effort on Hanscomb and the fact that you're here
this morning.

TESTIMONY OF VIRGINIA ALLAN, PRESIDENT, NORTH
SUBURBAN CHAMBER OF COMMERCE

Ms. Allan. Thank you, Congressman Meehan and Congressman
Torkildsen and Chair and Congresswoman Smith. It's nice to have
you here in Boston on such a nice, warm day. As Congressman
Meehan suggested, I'm President of the North Suburban Chamber
of Commerce. We're located on Route 128, which has been known
for years as the High Tech Highway. That has been affected over
the past few years by some changes in high tech in the Greater
Boston area. But we're on the move. We're on the move back.

The membership of the North Suburban Chamber is made up of
some of the largest companies in the Commonwealth, but more sig-
nificantly, the vast majority of our membership involves small busi-
nesses. These companies range from the classic Mom-and-Pop oper-
ations to those companies which have grown to now include several
hundred employees. Due to the location of the chamber, we have
a large number of startup and former startup software companies
which have been most successful over the past few years.

What is particularly interesting is that as these companies grow,
so too does their need for an understanding, tuned-in banker. More
than two-thirds of all our new businesses start out with less than
$10,000, much of it provided by the entrepreneurs themselves,
their friends and family members.

Once the firm begins to show signs of being established, it then
needs to look to banks and other institutions for financing. This,
of course, is a critical time for small businesses, who with appro-
priate financing might just beat the odds and be successful.



23-344 96-2



30

In talking with many of our small business members, I was
struck by the concern many of the smaller companies have with the
consolidation which we are currently seeing in the banking indus-
try, although in each instance there was not a willingness to cast
aspersions at any one bank, but more at the concept that as the
banks get bigger, the important personal service might diminish.

In most cases, these individuals were pleased to say that their
bank, their original bank before consolidation, was terrific, it was
those other banks. It reminded me of the comments individuals
make when they complain about Congress. Their Congressman is
always terrific. It's those others they have a problem with.

Mr. Meehan. And they're right.

Ms. Allan. An interesting case in point was the recent an-
nouncement of the merger between Bank of Boston and Bay Bank.
It appears that Bay Bank has been most successful in their efforts
to work closely with the small business community developing a
process which expedites service and sets criteria which small busi-
nesses can identify and work toward meeting.

They have taken pride in providing individual attention, assign-
ing a loan officer to each small business. It has been proven most
effective, and many of the businesspeople with whom I spoke were
hopeful that the new banking culture following the merger would,


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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 4 of 21)