Bill to help small businesses could put banks at risk

A bank sign


Bill Radke: The Senate could vote this week on a bill to help small businesses. The measure would send as much as $30 billion to community banks, a way of encouraging them to turn around and lend to small businesses. Marketplace's Alisa Roth tells us that strategy has its risks.

Alisa Roth: Small banks are in a tough spot. They're supposed to be lending more. But they're also supposed to be tightening their lending requirements.

The $30 billion from the government would make their balance sheets look like they had more cash. And the more cash they have, the more they can borrow from other banks. Then they can lend that money on to small businesses. But critics say that kind of borrowing is too risky. You know if you push the credit risk off to the public sector, you're likely to see more loans.

Eliot Stark works at Capital Insight Partners. An investment bank that provides services to community banks.

Eliot Stark: But you're also likely to see more losses as more and more marginal people get credit. It's a gamble.

People in favor of the bill says those kinds of fears are overblown. Bob Coleman is editor of a trade newsletter that reports on small business loans. He says banks are in the business of figuring out who they should and shouldn't lend to.

Bob Coleman: They understand there's a risk, but they're in the job of mitigating risk.

The bill, which is part of a bigger package of aid for small businesses, could get voted on this week.

I'm Alisa Roth for Marketplace.

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I thought this had been passed before the overhaul. This is kinda funny, as there are those (Camden Fine, for one, of the Independent Community Bankers of America - ICBA) who necessarily need to support this bill, but who were also bent over by Paulson, et al, when the preferred class of shareholders in Fannie and Freddie got hung out to dry. Primarily small banks, retirement funds / institutions, and retirement minded retail individuals looking for safe fixed-income investments; they all lost big when preferred share dividends were nixed in favor of the senior pfds purchased by gov.

Now the goverment is looking to recapitalize community banks, which is a good thing, as they're grass-roots lenders.

The bad thing is that they are, by this bill, hoping to loan money that these community banks should already have had, via the tier one capital consideration given to Fannie and Freddie preferred shares.

When the conservatorship 'bazooka' went off on Fannie and Freddie, roughly 15 to 20 billion dollars in value was literally blown up for many small and and some large sized banks across the country. Nixing the dividends just added insult to injury.

Camden Fine would make an excellent interview on this legislation, and topic in general.

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