The real economy is losing businesses and jobs on Main Street while it waits for the banking system to heal. It's time for new banks, unencumbered by legacy credit issues, to provide liquidity to Main Street.
Main Street needs access to capital to grow and prosper. Without it, businesses will wither and die. Based on recent data, that's exactly what is happening. Corporate bankruptcy filings have soared to 125,000 and unemployment has risen to nearly 10% (17% including the underemployed). Clearly consumers are borrowing less and saving more putting pressure on revenues, but businesses are also having difficulty obtaining credit to support working capital, investment and refinancing. Since 2008, commercial lending is down more than 20% (down 12% among community banks with assets of less than $10 billion) and the recent Tarp oversight report indicates that small businesses are suffering disproportionately.
Of course the banking system is not withholding funds without reason. Banks aren't lending because they are saddled with current and prospective loan losses. Until banks can restore capital, the focus will remain on healing old wounds rather than making new loans — and that means retained earnings and capital infusions by either a small-business lending fund or investors will be used to pay for problem assets rather than to make new loans.
What's more, there is no reason for banks to accelerate lending and increase leverage given the reasonable expectation that regulators will eventually increase capital requirements. So it's not surprising that government efforts to encourage lending by legacy banks have not produced the intended results. Meanwhile, Main Street suffers.
Perhaps it's time to turn the problem on its head. Rather than spend time trying to convince legacy banks with good reason not to lend that they should; the FDIC should remove the de facto moratorium on new bank charters.
There were only 20 new bank formations in 2009, down from 130 to 150 per annum precrisis and the lowest level since 1992. Accordingly, the amount of new, unencumbered capital available to make new loans crashed and lending capacity fell from more than $30 billion per annum in 2007 to just $3 billion in 2009. By coincidence, the decline in commercial lending since 2008 by Main Street banks (banks with assets of less than $10 billion) amounts to $34 billion.
De novo banks have traditionally been considered risky by regulators. They require regulatory care and diligence. Today, regulators are operating at full capacity handling the scores of "lower-risk" legacy banks that turned south when the credit bubble burst.
But now the logic for allowing new bank charters is compelling despite the perceived risk. Indeed, they may be precisely the right vehicle to increase lending on Main Street for the following reasons:
- New banks begin life fully capitalized and unencumbered by legacy credit woes, allowing them to make loans immediately.
- The lending environment is ideal given low competition, high underwriting standards and a steep yield curve. In other words, banks with unencumbered capital can readily make loans on the best terms seen in more than a generation.
- New banks typically serve Main Street.
- New banks do not pose a systemic risk because of their relatively small size.
- No new legislation or regulation is required to eliminate the moratorium or oversee new charters.
Public and private-equity investors understand all of the above and would move quickly to fund a bank unencumbered by the uncertainty of legacy credit losses — no taxpayer monies would be required.
Perhaps the greatest argument for ending the de facto moratorium on new bank charters is that the credit they would provide to Main Street would help revitalize the real economy and in so doing may improve loan values at legacy banks. In other words, a recovering real economy might actually help recapitalize legacy banks by reducing losses.