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Why Obama's Business Loan Program Will Not be Effective in 2011

by on
in The Business of Business Finance

President Obama has shown a willingness to try many different avenues to help improve the US economy.  Let’s give him credit for realizing the small business community is vital to an economic recovery.  Further, he realizes entrepreneurs are in need of capital to get past the difficulties on 2008 and 2009 and begin growing and (hopefully) hiring again.

The problem is he has not identified the real problem regarding small business lending.  It is not available capital; it is bankers’ confidence in the current regulatory environment.

The newly announced “lending enticement program” creates $30 billion lending fund  to make lending capital available to small banks at rates as low as 1%.  Unfortunately, even at these rates, bankers are not making loans.

Simply put, banks become profitable when they can access money inexpensively (savings deposits, the FED, etc.) and lend it out at higher rates.  However, when regulators and bank examiners change their underwriting standards and reclassify loans as “non-performing” that has a negative impact on a lending institution.  Often, it requires larger amounts to be held in reserves to protect against a bad loan.  Money held in reserve cannot be utilized and becomes a drag on earnings.

The problem is that troubled loans caused a near meltdown of our economy less than two year s ago, and many believe the regulatory agencies were asleep at the switch while it occurred.  Although many bankers complain of “unprecedented levels of toughness” from regulators, we cannot expect bank examiners to relax their requirements any time soon.   

Unfortunately, economic incentives will not lure bankers into making more small business loans.  We’ll need to find another vehicle to lead us to better economic times.

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