Break Up the Banks: Small Businesses Are Better Off With Smaller Lenders

Last Updated May 17, 2010 6:00 PM EDT

A growing pile of evidence tells us that the country's smaller banks have done right -- or, at least, righter -- by their clients than large ones. This will have to be a focus of regulators going forward, even if Congress doesn't come down hard on gigantic banks.

The Obama administration is seeking new legislation for a small business lending fund that would funnel money through smaller, community banks to entrepreneurs caught short by the financial crisis. This line from a congressional hearing today, uttered by Gene Sperling, a counselor to Treasury Secretary Tim Geithner, caught my attention. Smaller banks have done better than larger banks in helping small businesses:

[C]ommercial and industrial (C&I) and commercial real estate lending at banks with less than $1 billion in assets grew at an average annual rate of 3.5 percent for the eight quarters ending with the 4th quarter of 2009, while lending at banks with more than $10 billion in assets contracted at an average annual rate of 8.1 percent.
Wow.

In the aftermath of the worst financial crisis since the Great Depression, smaller banks managed to keep lending to their customers. Megabanks, who insist that their size is an advantage to the American economy, cranked back their lending.

As I've written before, that didn't mean that small businesses had access to all the credit they needed, only that the smaller banks they frequent didn't go into full reverse, as the Wall Streeters did, after Lehman Brothers went belly up. Once again, wow.

Now, the existence of the problem does not mean that the Obama administration has found the right solution to easing the small business credit crunch. It wants to create a $30 billion, state-administered fund to inject capital into banks that serve the neighborhoods where they are based.

The Congressional Oversight Panel has questioned whether this approach, which resembles that of the much-hated TARP, will really work. That's the nature of financial system rescues and cleanups: they are untested, messy and political.

But the more we know about the problem of lending to small businesses, the entrepreneurial core of the American economy, the more we can say: megabanks are not our friends.

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  • Carter Dougherty

    Carter Dougherty, a former economic correspondent for the International Herald Tribune and The New York Times, is fascinated by the intersection between policy and business, in the United States and abroad. He shared in a Loeb Award, business journalism's most prestigious, while at the NYT. But he still looks back fondly on his days trudging through central Africa, reporting on Congo, Darfur and other rough spots.