As the banking industry continues to consolidate at the local and national level, access to commercial lending by small business owners and investors continues to deteriorate. One of the major reasons why lending is being affected is regulation and its cost.
According to the Federal Reserve Bank of Minnesota, community banks with less than $50 million in assets will see profitability reduced by 14 to 45 basis points to account for new staff to handle the increase in regulation. Some may even become unprofitable and will have to go out of business or merge with other larger banks. Regulation is a necessary evil, but a balance must be struck between the regulated and regulators. Regulation has been instrumental in bringing light to systematic banking problems like Wells Fargo’s credit account fraud and Goldman Sachs mortgage bond fraud, just to name a few. However, we must also recognize that regulation must be written in an un-ambiguous manner that is easy to understand by banks and the general public so that the cost of the regulation does not become untamable.
Over all, lending to small business owners and investors by banks large or small is around 20% to 40%. Less banks competing for the business of lending to small business and investors means less access to capital that is brought up to the market due to competition. As we all know, competition in all industries bring down the cost of goods or services s as more businesses compete for the same dollar. But in the case of regulation, where the cost is almost fixed and trending is up, it discourages or creates a barrier to new entrants into the banking industry. This limited choice of banks to small businesses means higher cost of borrowing money to expand and create jobs in the community.
We, and just like many other commercial lenders, banking experts and concern citizens, agree with Capgemini’s position and research paper that we all have to work together to create a viable and stable business environment for banks to survive0 and grow their business while protecting the general public of institutions that violate the trust we placed in them.