The Federal Oversight Panel on TARP makes a valiant effort to determine factors causing the downturn in Small Business lending in their report issued today. For a Huffington article read here. Other data was uncovered by James Kwak in this post in regard to one TARP bank. This indicates a much more drastic reduction in the origination of credit than the Panel report cites. In my review of annual reports, most banks are not reporting good detailed data and the way each defines Small Business is different. I would be very curious about what data was presented to the Panel by banks. In my quick review, it appears the Panel attempted to rely on data from government sources.
In other words, there is a lack of transparency. Sigh.
Despite these criticisms, there is a lot of quality work in this report. Some areas that deserve more attention are:
What are the business deposits the banks are taking from the communities they serve and how much is provided back in Small Business Lending? The ratio of Small Business Loans to Small Business Deposits would be a good measure. This information should be easily obtainable from the banks.
The report identifies the shift towards Quantitative Scoring models as resulting in greater variation of Credit Supply. To follow up on this line of thought, the questions should be asked about whether the banks have the skills to engage in relationship banking with a credit focus. A scoring environment would result in the diminishment of skills at the level facing the customers. Therefore at the time the Small Businesses need it most, the skilled bankers needed could be in very short supply. Note I highlight skilled bankers, not skilled salesmen.
Additionally, the questions should be asked about what changes were made in bank policies through the recession. If there was not a reduction in credit supply (versus demand), then there should have been no major tightening of credit standards and policies.
Were any groups that previously had access to credit excluded from obtaining credit? This would mean outright prohibitions on certain types of loans or industries. These days there are many banks that are restricting commercial real estate loans because of industry conditions, risk concentrations, and capital constraints. Over the last two years, was there other rationing of credit and was it justified by safety and soundness concerns or was it based on other management factors?
How were bankers incentivized? Did their incentives shift away from credit to other products?
What was done with excess business deposits? Were Small Business Deposits effectively diverted to activities deemed more profitable? In light of the current legislative matters, was there a shift to activities and products that could more easily be securitized or otherwise repackaged into derivatives, CDOs or other investments?
How much additional concentration of Small Business Deposits has there been as a result of bank failures and acquisitions? Are the comparisons apples to apples? For example, if Bank A made X dollars in Small Business Loans in 2007, but Bank A is now the combination of Bank B and Bank A, should not the change in the flow of credit reflect that combination?
Finally, what should be done about this issue? This country’s economy is still operating far below potential. Most economists believe it will take several if not many years to get economic activity up to a level consistent with full employment and general prosperity. There must be a “Marshall Plan” in regards to entrepreneurship and Small Business Lending. Is any bank implementing a Marshall Plan? Not that I can see.