Felix Salmon

Those infuriating community banks

By Felix Salmon
August 13, 2009

I’m getting quite fed up with the Independent Community Bankers of America. First they self-defeatingly came out in opposition to the Consumer Financial Protection Agency, now they’re refusing to grant government-guaranteed loans to small businesses just because it’s not particularly lucrative and they can’t be bothered to do the underwriting.

“There’s not a lot of profit motive in a $35,000 loan stretched over six years,” said Paul Merski, chief economist for the Independent Community Bankers of America, a trade association.

Bob Seiwert, of the Center for Commercial Lending and Business Banking at the American Bankers Association, says “stringent underwriting standards” will require as much work as larger loans, making these even less economical…

It would appear that banks like M & I are using that flexibility more to deny than to approve loans. For example, Wells Fargo, one of the largest Small Business Administration lenders, has received 700 to 800 completed applications, said Tom Burke, the senior vice president overseeing small-business loans at Wells Fargo, but has approved only “several dozen.”

I’m not sure that it’s fair to M & I Bank of Milwaukee to judge it by the actions of Wells Fargo. But maybe it is. It does seem clear that with only $36.8 million of loans extended since May, precious few lenders seem to be in any hurry to get their hands on these SBA guarantees.

I wish these loans could be disintermediated somehow: I’m sure there are lots of Americans — even Americans who know how to underwrite loans — who would love to get 2 percentage points over prime on $35,000, spread over six years. (Prime is currently 3.25%, and almost certainly won’t go any lower; that puts a floor of 5.25% on the interest that these loans throw off. Try getting that from a CD.)

Instead, the banks seemingly hate to do their job, which is simply underwrite loans — the only thing they’re worried about is that if the borrower defaults, the SBA will go back and check that they bothered to underwrite the loan in the first place. In 95% of cases the bank did do just that, and the guarantee is paid out. But obviously there needs to be some check by the SBA: you can’t have banks just giving away money, safe in the knowledge that they’re bound to get it back, with interest, from the government.

There’s a subtext to this story, too, which is that banks still don’t seem to be worrying nearly enough about credit risk. The SBA is offering to bring credit risk down to zero on a large class of loans, and they’re basically saying “thanks, but no thanks”. My guess is that competent underwriting skills were left to wither away during the Great Moderation, and that they’re hard to rebuild. And that for all that they call themselves “community banks”, the smaller shops are in just the same place as the big boys. They’ve forgotten how to underwrite loans, and now they’re scared to lend to small businesses, lest the SBA find out that their underwriting was a chimera all along.

5 comments so far | RSS Comments RSS

The banks have the choice between writing relatively profitable and relatively unprofitable loans.

They choose profitable; you would choose unprofitable.

Stick to journalism.

Posted by Thomas Esmond Knox | Report as abusive

“They’ve forgotten how to underwrite loans, and now they’re scared to lend to small businesses, lest the SBA find out that their underwriting was a chimera all along.”

I see this a little differently. The bankers are shell shocked. The govt guarantees, unfortunately, have been irregular in this crisis, to say the least. We’ve been in Debt-Deflation. This requires a higher escape velocity than under normal recessions. In fact, this shows why Debt-Deflation is so awful: It requires a huge nudge, more like a shove, to get people back to even prudent investing as opposed to panicked investing.

The smaller banks are worried about fees for insurance, the fact that they’re not TBTF, and whether or not we’re really in recovery mode. It’s not that they’ve forgotten how to do things. It’s more likely that they’re still afraid.

If you see our crisis through the lens of Debt-Deflation, then this lingering fear makes perfect sense. That’s why we’re not in the clear yet.


The job of a loan officer is to write good quality loans…not just loans to make us all feel good. What is the point of the prior two years if the lesson is quickly forgotten ?

That lesson: trust a distant lender on Wall Street, not the best idea. Trust a local lender who will know his local economy, much better idea.

Don adds an excellent point…the rules (regulatory, non-regulatory) continue to shift.

Posted by Griff | Report as abusive

So if we want to encourage business lenders to make loans to small business but the lenders think the underwriting costs are too high, why don’t we subsidize the underwriting?

Posted by Adam | Report as abusive

I think the bigger puzzle is why investors are pricing securitized SBA stuff as if they and not taxpayers were on the hook for losses. (i.e. why does SBA securitization need TALF support)

Posted by thruth | Report as abusive

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