Next to taxation, no issue stirs up as much passion in the war between banks and credit unions as business lending.
Business loans can make up no more than 12.25% of a credit union's assets, but for years the industry has been lobbying Congress to raise that cap to 20%, arguing that higher-yielding business loans could alleviate persistent margin pressure. Plus, credit unions say they would be meeting a need for small-dollar loans that, they claim, banks don't want.
Bankers reject the notion that they are not interested in small loans. More broadly, though, they contend that letting credit unions make more business loans is risky because neither they nor their regulator have the expertise to evaluate borrowers' creditworthiness. To make their point, they have reminded lawmakers that savings and loans were given expanded business-lending powers back in the 1980s, and we know how that turned out.
Though repeated efforts to raise or eliminate the cap have so far stalled, the credit crisis may be giving credit unions some ammunition. Sen. Charles Schumer has introduced a bill that would eliminate the restrictions on business lending in hopes of making more credit available to small businesses. His office estimates that, without the cap, credit unions would originate $10 billion of new loans within a year.
The bill could get some legs because everyone in Washington wants to appear friendly to small business. Also, it is not facing the usual opposition from the banking lobby, which is saving its political capital for bigger public policy issues. (Banks' protests might ring hollow anyway, given the losses they have racked up on loans to commercial borrowers.)
I have no position on whether credit unions should be allowed to make more business loans or not, but I do question the timing of this proposal.
Let's start by talking about capital. Credit unions are essentially prohibited from raising it, yet there is no provision in Sen. Schumer's bill that would give them access to new capital to support the additional risk on their balance sheets.
There's also the question of demand. Yes, the intent of the government's alphabet soup of stimulus efforts - TARP, TALF, PPIP - is to unfreeze the credit markets, but the fact remains that quality loans are still hard to come by these days.
Competition is generally a good thing, but too much of it can lead to questionable underwriting decisions. With the economy already in a deep recession, is it wise to encourage even more of it?