Small-business owners cheered last October when President Obama announced plans to inject capital into community banks to spur lending.
The proposal underscored the government's growing recognition of community banks as vital engines of economic development and job creation.
The business owners recognize that community banks tend to be more flexible than larger lenders. Perhaps most important, entrepreneurs also recognize that, when working with a community bank, they have the opportunity to deal with someone who's actually in a position to make decisions — not an impersonal liaison based on algorithmic tools. Also, the level of service customers receive lets community banks offer increasingly high levels of support for business and consumer accounts.
From a macroeconomic standpoint, there's an obvious and significant role for the large financial institutions in the U.S. From a local perspective, however, community banks fulfill a key role in boosting local economies by creating local jobs. That alone justifies the political and public support they are now receiving.
Despite the president's proposed capital infusion, the more effective course of action may be to enact temporary tax law changes. Doing so will have a more direct, substantive and much broader economic impact.
That's because, by helping businesses improve their balance sheets, they'll be in a position to more readily secure funding from lenders that, naturally, require borrowers to be on a solid financial footing. As job creation is the ultimate objective of President Obama's plans to stimulate small-business lending, it is critical for community banks to maintain strict underwriting guidelines and adhere to the fundamentals of lending — more so than for large institutions. A bad loan is much less forgiving in a small institution, even with the assistance of Tarp money.