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 7 of 21)
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this new growth area because my ratios are going to come out of
line, and they're going to question my line of credit."

Chairwoman Smith. That's a point well, made, although one
thing The Internal Revenue Service and Congress have done in
their — I'll say "wisdom" facetiously — but they have blocked us into
certain long-term depreciation schedules. That's certainly due to
our capital and our ability to have that flexibility.


Twenty years ago when I was preparing taxes and doing tax
planning, I had more latitude. But as you know, with ACRS, it ac-
celerated and then moved back to blocks of time, you have 15 years
on a roof whether you like it or not. You have 7 years on certain
things whether you like it or not. You don't have that flexibility
that you used to have.

That seems to me — I know in some of the companies that I've
worked with — I haven't in the last few years, but even 7 years ago,
I was having trouble with a lot of the capital, the up front being —
you could look good on paper, but you really weren't as good is the

Mr. Meehan, did you have another question?

Mr. Meehan. Well, I did, but it was on the expensing rec-
ommendation of the White House Small Business recommendation.
So, I just want to thank the panel. I've worked with most of you
but look forward to working with all of you on these issues and
other issues.

Chairwoman Smith. I also want to thank you all. It has been en-
lightening. You've made me want to go back and start another
business. It's contagious. It's like a disease. Or maybe better yet —
let's not call it a "disease," but there's something that gets inside
of you, and maybe a good habit. You certainly have to like to do
it, or you wouldn't, with all the obstacles.

Mr. Torkildsen?

Chairman Torkildsen. I also want to give my final thanks to all
of the witnesses today for your testimony. We appreciate your con-

Chairwoman Smith. We will adjourn.

[Whereupon, the Subcommittees were adjourned, subject to the
call of the chair.]


Opening Statement


Chairwoman Linda Smith

Subcommittee on Taxation and Finance
House Committee on Small Business

' Effects of Bank Consolidation
on Small Business Lending "

Boston, Massachusetts
March 4, 1996 11:00 a.m.

Good morning. It's a great pleasure to welcome you, our witnesses and guests, here
in Boston.

I am joined by my colleagues, Mr. Peter Torkildsen, Chairman of the Subcommittee
on Government Programs and my co-chair today, and Marty Meehan, Ranking Member
of our Subcommittee on Taxation and Finance. Their knowledge and dedication to the
needs of small enterprises in New England are invaluable to our efforts here today.

As some of you know, the Small Business Committee last week began a series of
hearings in Washington, D.C. to explore small business access to capital. We believe this
field hearing will provide important and useful information to the Committee on bank and
alternative sources of capital for small businesses.

In particular, we will focus on the credit challenges and trends small enterprises may
be facing in New England. We will review the response and initiatives to these challenges
of recently consolidated banks and of existing banks in the region. And, we will explore
private sources of lending and financing solutions for New England's small entrepreneurs.

Congress should continue to encourage private sector access to capital by eliminating
unnecessary and burdensome regulations, and by fostering competition. At the same time,
we should continue to obtain basic data on small business lending to monitor recent
legislative relief and future reforms.


In my own home state or Washington, there have been a substantial number of bank
mergers over the past seven years. The Washington State Bankers Association has prepared
a statement for the record (attached to this statement), which reports that bank
consolidation within Washington has not affected small business lending. While large,
consolidated banks are moving away from more traditional loans toward low-cost,
standardized loans (i.e., "credit scoring"), new community banks have emerged and appear
to be finding a market and aggressively competing for "customized credit."

Overall, banks continue to be a vital source of capital for small businesses (who can
not easily raise funds through stock offerings and have little access to national credit
markets or larger banks outside of their area). It will be important to determine,
therefore, whether new emerging community banks will be able to fill the gaps in small
business lending. Will they be able to provide ongoing service and relationships — including
"character loans" — to small entrepreneurs in the long term'!

Further, a thorough analysis of this fundamental issue must recognize the influence
of tax policy on access to capital for small enterprises. Specifically, small business owners
and potential investors must be able to save and retain capital since personal wealth is the
single most important source of capital used to form and expand new businesses and to
create jobs.

As small businesses turn to alternative sources of financing in the private sector to
grow and develop, we must reduce the staggering dollar and compliance costs of the current
federal tax system. Eliminating or reducing the double taxation of investment income and
capital gains, for example, could unleash trillions and trillions of dollars in our economy.

Imagine then the possibility of more "angels" - rare today, but still the most
promising additional source of capital for small entrepreneurs in my mind - providing
financing and expertise to an ever growing number of small enterprises driving economic
growth in New England, Washington, and across our nation.


BANKERS r^r eo

ASSOCIATION FAX (206! 221-6443


During the past seven years, over thirty five bank* located within the State of Washington have
been merged into other financial institutions. These have ranged from relatively small mergers of equals to
large mergers between multi-billion dollar banks. During the same period, over thirty new banks have
been formed within the State; all of which are profitable and continuing to grow.

Based upon knowledge of the market and input from bankers at all levels, bank consolidation
within Washington has not adversely affected small business lending.

In order properly to analyze the supply side of small business loans within the banking system one
needs to consider not only the effects of consolidation, but trends in the banking industry generally. Even
then, it would not appear that one can separately measure the cause and effect of each factor. Uninfluenced
by consolidation, many banks of all sizes are becoming more focussed in their products and services.
Included in that process are banks that are concentrating on lowering costs by standardizing products; in
the loan area notably by credit scoring. In that process they are declining to offer customized credit as is so
often needed in addressing small business credit needs. At the same time, many banks that are switching to
the standardized approach to some or all products are doing so because they have been acquired by a bank
that already has adopted that approach, or they feel that their corporate growth targets can be met best by
converting to the standardized, low-cost approach.

At the same time that some banks may be indicating an unwillingness to customize credit to serve
small businesses, community banks, and particularly those newly established, see the provision of
customized credit as a cornerstone for success; particularly in the small business area.

Having said that, no retreat from small business lending has been detected in Washington . And,
if there has been any retreat by some banks, two important facts should be noted. First, the driving force, if
any, has not been consolidation And, second, the demand has been adequately met by existing and new
banks, particularly the start-up community banks.

While precisely quantified evidence for the above conclusions has not been obtained, they are
amply supported by the fact that Washington's major banks continue to be leaders in SBA loans, with
substantial portfolios of small business loans generally, and the aggressive posture of the newer banks
generally with respect to small business lending-in many cases their ration a" etre.


Congress of the Bnited States

House of ■ReprtsmtatioeB

io«h CongrtBB
Committee on Small Business

.Subcommittee on (3ootmmtnt programs

J5-W Kaubum tioust Gffict Building

Washington, B£ 20111






MARCH 4, 1996

Thank you Madam Chairwoman.

It is a pleasure to be in Massachusetts today to co-chair this
important field hearing on bank consolidation and its effect on
small business access to credit.

While banks have historically been the primary source of capital
for small business, their lending to small business over the past
few decades appears in decline. Through this hearing, we hope to
determine how the trend toward bank consolidation has effected
small business access to credit.


As a result of the failure of many New England banks in the late
1980' s, the number of bank consolidations increased. The FDIC
did not provide banking services at failed banks, thus creating a
disproportionate impact on small business.

Restructuring and consolidation are words spoken often as New
England progresses through enormous changes in the structure of
business. These changes affect the economy, especially
employment, in a number of industries from banking to tourism.
In 1993, industries dominated by small firms posted a net gain of
1.06 million jobs, while industries dominated by large firms lost
200,000 jobs. Industries in which employment is divided more
evenly between large and small firms gained more than 700,000
jobs in 1993.

Small business represents 53% of the private workforce and 100%
of the sole proprietors in New England. As small business plays
a greater role in our economy, the primary question to ask is
whether small business has adequate access to the capital it
needs to expand and flourish.

Just this past month, the Federal Reserve Bank of New York
released a study on the availability of credit to small business.
The study states that small business is a very profitable section
of the economy and that the trend toward bank consolidation will
not affect small business lending. In contrast, the Federal
Reserve Bank of Boston did a similar study, released in January,


1995, finding that there may, in fact, be an effect on small
business lending. The Boston study dealt more closely with the
issue of regulation and the burdens it places on small business,
where as the New York report dealt specifically with ban);
consolidation and small business lending. I am interested in
hearing any insights from our witnessas regarding the two

I look forward to the expertise our witnesses of the small
business and banking communities bring to today's hearing on
these issues. Now I will yield to my colleague, Mr Meehan, for
any statement he may wish to make.



318 Cannon house On



small business
n«ing Minority member

northeast miowest congressional Coautio

Congressional manufacturing task force

(EongrcHB of ti\t Initco States
House of ScprEBEirtatiuEB

HJasljington, l.(E. 20515-2105

Representative Marty Meehan

Opening Statement

February 29, 1996

Small Business Joint Subcommittee Field Hearing

The Effects of Bank Consolidations on Small Business Lending"




16081 459 0101

Good morning. Thank you all for coming. I would also like to thank the Chairs,
Representative Peter Torkildsen and Representative Linda Smith for joining me here today.
This morning's hearing will focus on the impact of bank consolidation on small business
lending - a particularly relevant subject given the recent wave of mergers in the New
England region. The first panel is comprised of banking experts and representatives —
including larger banks like Fleet and Bank of Boston as well as traditional, community
lenders. Chris Gallagher has traveled down from New Hampshire to serve as an expert
witness on this panel, since he testified at the 1991 Senate hearing on the credit crunch. The
second panel is comprised of representatives of the small business community in
Massachusetts — including the executive director of the Smaller Business Association of New
England, Julie Scofield, and the President of the Associated Industries of Massachusetts,
John Gould.

In the past decade, the Massachusetts economy has undergone considerable changes. A
financial crisis was precipitated by a dramatic faU in real estate values, and as a result, many
financial institutions failed. The shrinking defense and computer hardware industries added to
the recession, while local and state governments were faced with decreasing revenues
compounding already high levels of unemployment. Today, Massachusetts and New England
are still struggling to recover.

Massachusetts — and the fifth District in particular — has made some important progress
toward recovery, but economic renewal is difficult. Small businesses and start-up companies
continue to be our best source of job growth and stability. To be sure, smaller firms
represent the future of the New England economy. And like all companies, small businesses
depend on capital availability to start-up and to remain productive and competitive in LOday's

With recent bank acquisitions in New England and nationwide, there is widespread concern
that the capital needs of small businesses will be disregarded in favor of lending to larger
companies. Small business loans are labor intensive and less profitable. According to a
recent study by Peggy Gilligan of the Federal Reserve Bank of Boston, the eight largest

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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 7 of 21)