Small Business Priorities At The Federal Reserve And NCUA

The Fed’s recovery strategy increases attention to small businesses. Is the credit union system aligned in meeting this need?


Ben Bernanke’s July 12 speech for the Federal Reserve Meeting Series “Addressing the Financing Needs of Small Businesses" wasted little time getting to the point. The Chairman vocalized concern about the availability of small business credit, outlined the trials in increasing access to loans, and laid bare the solution for current turbulence in the United States small business market.

Bernanke reaffirmed the importance of small businesses, which employ nearly half of all American workers, account for “about 60% of gross job creation,” and are crucial to securing a steadfast recovery.

“The formation and growth of small businesses depends critically on access to credit,” Bernanke said. “Unfortunately, those businesses report that credit conditions remain very difficult.”

“Though some lenders said they were emphasizing cash flow and relying less on collateral values in evaluating creditworthiness, it seems clear that some creditworthy businesses – including some whose collateral has lost value but whose cash flows remain strong – have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating.”

Bernanke stopped short of citing specific financial institutions, but in presenting the solution, he was bitingly direct: “Making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges.”

NCUA’s Latest Action In Arrowhead’s Conservatorship

Despite the urgency of Bernanke’s address, his message is not yet implemented in all circles. Yesterday, NCUA released a statement lauding Bernanke’s approach, but a previous statement concerning the future of small business lending at the newly conserved Arrowhead Credit Union tells a conflicting story.

"While Arrowhead is in conservatorship, NCUA has determined this line of business [member business loans] is not in the best interest of members and does not make sense for the credit union," said spokesman John McKechnie in a July 8 Press-Enterprise article. According to the article, the credit union will no longer offer new applications for business loans, SBA loans, or corporate credit cards.

NCUA again failed to provide any data that would support exiting this market as in either the members’ or the credit union’s interest.  Arrowhead Credit Union is the largest community lender in the Inland Empire.  Shutting off credit to viable borrowers in a community hard hit by the recession hurts everyone trying to help with the economic recovery.  It stunts new business development, growth in existing businesses, and increases the vulnerability of those business owners who relied on the credit union as their financial partner. 

Where Is The Industry’s Leadership?

Bernanke’s speech confirms the critical role of credit for small businesses. Large corporations and borrowers (states, Universities) can go directly to the markets for debt. Small business has only financial institutions.

The credit union industry has demonstrated its commitment to member business loans. According to Callahan’s Peer-to-Peer software, loans for member businesses granted in 2009 totaled $9.7 billion, and total outstanding business loans as of March 31, 2010 grew by 10.5% year over year to reach $29.9 billion.


Source: Callahan’s Peer-to-Peer software

The industry has lobbied for years to increase the small business lending cap, currently at 12.25% of assets. It is CUNA and NAFCU’s top priority in Congress, with daily efforts to sway legislative support.

When will NCUA show it is willing to walk the talk, not only in Washington D.C. but also in communities across America?




July 12, 2010


  • For many years I was a director of small banks (3-400 MM range) and on three occasions we darn near lost the bank due to business loan gone bad - mainly rogue loan officers. What CU's simply do not understand is that business lending is nothing like what we've been doing for so many years. It's highly dangerous and a new, difficult and expensive learning curve.
    Evans Harrell
  • Hmm... rogue Loan Officers... sounds like either fraud, bad hiring practices or weak under writing standards. So how exactly do any of those three things translate into the line of business being "highly dangerous" (hint: it doesn't). Logic tells me that if you have any of those three things going on the loan type will not matter. Perhaps we should not loan any money... oh wait that is the purpose for our existence. This whole banking (credit unioning) thing is just so dang hard anymore.
  • Any conclusion towards the fact that a particular loan portfolio is risky or not, has to be based on solid analysis, logic and rational, as opposed to the one based on perception or politics.

    The first line of defensive action, even if analytical results are indicating a risky and flawed loan product, should be to create enough regulatory and policy based correction, protection and insulation to make a product more safe and sound as opposed to shutting it down completely or taking over control of a credit union, especially at the time when membership and community is in the dire need of such a loan product.
    Salim Aziz