Is Maryland’s Lend Local Act enough to loosen small business commercial credit?
Most people think of It’s a Wonderful Life as one of the greatest, if not the greatest, Christmas movies ever filmed.
It also happens to be just about the best P.R. that local community banking has ever received. If anyone, anywhere, has ever done a better job of highlighting the direct impact that actively engaged “relationship bankers” have on the economic well-being of the communities they serve, please share it.
Ben Bernanke himself asserts that not one of the “too big to fail” banking institutions has an algorithm sophisticated enough to match the “in-depth local knowledge that community banks use to assess character and conditions when making credit decisions. This advantage for community banks is fundamental to their effectiveness.”
Of the few Frederick-area businessmen and women who came to the Weinberg Center for last week’s town hall meeting of Maryland’s Small Business Commission, a significant number claimed “trouble getting loans” as their most pressing issue. This isn’t unique to Frederick. All over Maryland, businesses owners are frustrated by the lack of “affordable and reliable credit” needed to grow their businesses.
Large institutional banks have tightened credit so much since the recession they may well find themselves the subject of an upcoming episode of Hoarders. (This is a great show to watch if you need motivation to clean out your garage. Or anything else, for that matter.)
Early in April, along with co-sponsor Senator Ron Young, the Maryland Senate passed Senate Bill 792 – Lend Local Act of 2012, which was subsequently signed into law effective July 1, 2012. Simply put, the State of Maryland promises to use local banks for $50 million worth of deposits in return for those deposits being lent to small businesses at below-market interest rates. A loosening of the credit supply would go a long way toward overcoming some of the regulatory hurdles that Maryland business owners face.
However, $50 million across the entire state of Maryland doesn’t go as far as it may seem. Not only that, but in speaking with one local community bank executive, who stated that he is “intimately” familiar with the legislation, it seems there is not that much enthusiasm for programs that involve government deposits. ”We struggle with enough government red tape as it is,” he said, “and frankly such deposits are just not that dependable” when one factors politics in to the equation.
No question that several of Frederick’s large and small banks have taken serious hits on commercial loans and real estate used as collateral. But while real estate values continue to be a drag on balance sheets throughout the banking industry, local banks have come through this crisis in much better shape than most of their large institutional competitors.
It shouldn’t take an act of legislature to encourage Maryland to use local banks for state deposits. It seems common sense to infuse local lenders with capital when they are in such a great position to jump start our business communities out of this recession. And now is the time many major businesses that survived the recession are reporting record profits, and are crying out for capital to expand.
Smaller businesses are beginning to see the trickle-down effect and face the same needs for capital, as the Small Business Commission representatives admitted they hear over and over.
MacRo Report noted in a previous post that some economists are predicting the recovery from this recession will be regional, with states and communities led by fiscally responsible governments seeing the strongest (and longest lasting) improvements.
Frederick is uniquely situated in Maryland, and is poised on the brink of some exciting new development projects that will provide growth opportunities for new and existing businesses alike. There are any number of Washington and Baltimore developers who are beside themselves at the potential they see in Frederick’s future, and are drooling over the opportunity to get involved somehow.
It would be better for Frederick on many levels if the capital to finance these projects is provided locally. This is an instance where Frederick County’s “small town” culture can be leveraged—it’s certainly easier for our local banks to weigh risks and rewards of commercial lending in a business community as intimate as Frederick County. And keeping the money in town means Frederick keeps some control of its own destiny.
But can Lend Local really make enough of a difference? While it’s always refreshing to see Maryland trying to be part of the solution, the best thing O’Malley can do is move quickly to untangle the mess of taxes and regulations that discourage business in this state. Otherwise Maryland communities are destined to play Potterville to Virginia’s Bedford Falls.
Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com.