Tuesday, January 12, 2010

Some Thoughts on Business Loan Legislation

The Credit Union National Association is arguing that legislation expanding the ability of credit unions to make business loans would increase business loans by $10 billion at credit unions and help create 108,000 jobs.

However, is this actually a net expansion of business loans for the economy or just a shifting of loans from banks to credit unions?

My thinking is that it is the latter.

I suspect given the economy, credit unions are only going to make prudentially sound loans to creditworthy business customers, just like banks.

Moreover, I doubt their regulators would permit them to go hog wild and make business loans to weak or marginal credits.

There might be some differences in judgment as to creditworthiness on the margin; but overall, banks and credit unions would continue to compete for the same customers.

So, the net impact is that this bill will not increase the size of the business loan pie.


  1. Why would the business loans shift from banks to credit unions unless credit unions were willing to offer better rates or offer loans to applicants that had been rejected by banks?

  2. Keith, you must be kidding on this one. Banks are not lending, it's that simple. They put their TARP funds in securities and not in small business lending. The pie may not have gotten bigger, but banks have left a lot of customers locked out of the kitchen. Let's get this economy going again, get out of the securities market, and let’s put money back to where it's needed. If CU's want to fill this need, no one should be stopping them.

  3. Credit unions don't have customers. They have members. Most bankers I know have a difficult time getting their minds around this fact. Apparently, you are one of them.

  4. According to FDIC call report data, more than 3,200 banks reported higher commercial and industrial (C&I) loan balances as of September 30, 2009 compared to June 30, 2009.

  5. Dr. Leggett,

    I may be drastically oversimplifying, but I'm sure you are familiar with what happens to quantity when supply increases. More business credit available lowers price of credit (rates) in increases quantity of credit demanded.

    For your claim to hold true, we would have to assume a verticle demand curve, in otherwords, a "business loan pie" that is unresponsive to changes in supply of business credit. Is that one of your assumptions? If so, what is the justification of this assumption?

  6. Keith,
    How many banks are there now, around 8,500? From those 3,200 as a percentage of assets, how many have higher loans than the end of 2008, not just in the last quarter?

  7. President Obama proposes Wall Street banks pay $90 billion over 10 years to reimburse taxpayers for the financial bailout, as he slammed bankers for their "massive profits and obscene bonuses."

    In response to the mess their members created, the American Bankers Association continues their assault on credit unions and has one of its economists "keeping an eye on the credit union scene."

    Way to go ABA. Your thinking seems sound and rational. I'm going to remember this the next time my dues bill comes in.

  8. I am asssuming that the underwriting standards of credit unions are unlikely to be different from banks. Of course, this may not be true.

  9. Outstanding C&I loans are up at over 3400 banks since December 2008.

  10. 3,400 banks out of 8,500...so you could say they are lower at 5,100 banks. Not the best of headline though. Again, I'm assuming that this is also as a percentage of assets. As for underwriting standards, instead of assuming, let's compare charge-off and delinquency numbers.... Oh, I guess you probably won't want to do that.

  11. Dr. Leggett,

    I am unclear how the assumption of similar underwriting standards justifies the above observations. To produce a vertical demand curve required for your "business loan pie" argument, borrowers of the required credit quality would have to demand the same amount of credit regardless of the rate, which I don't believe is true.

    Also, by "pie" I am assuming that you are referring to demand for credit, because raising the cap would clearly increase the supply of credit.

    Further, supply influences quantity and price demanded, not the demand curve itself. Please elaborate. Similar underwriting standards would have no impact on the size of the pie.

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