Bill Would Let Banks Invest in Small-Business Borrowers

Banking companies could become major small-business investors - not just lenders - under a bill introduced this week by Rep. Richard Baker.

Rep. Baker, chairman of the House Banking Committee's capital markets and securities subcommittee, wants to allow bank holding companies with less than $1 billion of assets to invest in firms that borrow from their affiliate banks.

The goal of his proposed Entrepreneurial Investment Act is to generate capital for small businesses.

"Community banks have a working knowledge of their clients," the Louisiana Republican said in an interview Thursday. "This bill will help small businesses gain an alternative way to grow."

The bill would allow the eligible holding companies to acquire up to one-quarter of the voting shares of their banks' borrowers. According to the Federal Reserve Board, 4,994 banking companies with $451 billion in total assets would be eligible.

A holding company would have to be well-capitalized, and could only invest 50% of its excess capital. Banking companies also would be prohibited from participating in active management of the companies they buy into.

Rep. Baker's proposal - which House Banking Committee Chairman Jim Leach's staff said Thursday he may support - drew mixed reviews from industry trade groups.

American Bankers Association chief lobbyist Edward L. Yingling said the bill has "real possibilities," though his organization has taken no official stand yet.

"There is a need in rural communities to get long-term financing to small businesses," he said. "Congressman Baker has put forth an innovative proposal designed to increase capital availability to small businesses, while providing strong safeguards to ensure that safety and soundness protections are not weakened."

But the Independent Bankers Association of America, which represents community banks, opposes the bill. IBAA executive vice president Kenneth Guenther said the bill could weaken the barriers to bank ownership of nonfinancial businesses.

"Doesn't this open the door wider in terms of mixing banking and commerce?" he asked.

Mr. Guenther also questioned the need for the legislation. "Community bank lending is already sufficient," he said. "This could be viewed as a substitute to normal lending."

A staff member for Rep. Baker said the congressman was willing to work with the trade group to iron out differences.

Rep. Baker, who supports common ownership of banks and nonfinancial firms, said his proposal would not weaken community banks. "This bill acknowledges that a community banker knows his customer and is well positioned to invest some of his excess holding company capital in equity investments," he said.

The proposal would change a long-standing restriction on investments by bank holding companies. The Bank Holding Company Act restricts institutions from holding more than a 5% equity stake in any business.

But the bill would limit holding companies to investing in borrowers that have been customers for at least one year. The bank holding company and the borrower also would be prohibited from marketing each other's products.

The holding company would be required to obtain a one-time approval from the Federal Reserve Board before making any investments. To determine capital levels, the securities would be marked to market.

If the holding company later obtained an equity stake greater than 25% of any borrower's voting shares, because of a bankruptcy, for instance, the institution would have three years to divest the excess shares.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER