One of the big ideas being batted around in Washington to stimulate small-business lending is securitization.

The assumption is that banks are reluctant to lend, as reflected in low loan-to-deposit ratios, and that one way to resolve this is to securitize the loans. Proponents seem to think that the risk attendant to small-business lending is what makes banks reluctant, and that getting the loans off the books would rectify the situation.

But the bankers I know are looking for loans, not trying to sell them.

Top Priority

They realize that their business is to serve as intermediaries in risk -- first and foremost credit risk. Extending credit is a top priority. Many banks, of all sizes and stripes, are looking for quality small-business credits.

These loans are the highest objective for super community banks that emphasize relationship-oriented lending, and for many other banks attracted to the loans' profitability.

Owners of small businesses are not as sensitive to prices as are larger corporate borrowers. They value the time and effort that bankers take to build a relationship and to understand the ins and outs of their business. And since small businesses do not have ready access to capital markets, they are willing and prepared to pay a premium for bank credit.

Banks continue to view smallbusiness lending as a primary activity. If they have not extended enough credit to small businesses, then it may have more to do with the examination process and the weakness of demand.

Securitizing small-business loans is not going to answer the banks' needs. They do not want to offload credit; they want to keep it.

Securitization may actually have the opposite impact than what proponents intend. Examining the securitization market for mortgages, one observes that the spreads in that business have narrowed sharply.

Government Competition

Many thrifts have complained about having to compete with the government-sponsored secondary-market agencies, which have implicit guarantees and economies of scale that the individual thrifts lack. The profitability of mortgages -- the thrifts' core product -- has declined to the point where many institutions are seeking another strategic anchor for their business.

This scenario may repeat itself in small-business lending if securitization proceeds along the lines being proposed. Margins will shrink and banks will search for other places to extend credit.

If President Clinton is right in suggesting that banks are withholding credit from worthy small businesses, then the securitization solution may be appropriate.

But if the reasons for the perceived credit crunch are different, small-business loan securitization may be a disaster for commercial banks and for the many thrifts moving into community banking, without confering a significant benefit on the borrowers.

Let relationship banking continue and let the free market determine the best path for meeting borrowers' needs. This is not an appropriate time or place for government intervention.

Ms. Bird is national director of the financial institutions consulting group at BDO Seidman, New York.

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