Are large banks safer than small community banks? Should the Federal Reserve adopt Britain’s new plan for small-business lending?
These two seemingly unrelated questions could bump into each other later this year and impact, negatively or positively a dealer’s small-business payroll accounts as well as the overall lending to small businesses by the nation’s community banks.
Specifically, I’m referring to the little-publicized end to the current Federal Deposit Insurance Corporation program that provides unlimited insurance for the more than $1 trillion in non-interest-bearing accounts, the kind small businesses primarily use for payroll and similar recurring expenses.
Set to end this year, this program was instituted during the crash of 2008 specifically to reassure small-business owners that it was safe to keep their funds in small community banks. The fear, of course, was that businesses would move their funds en masse to the large banks because they’re perceived as safer (the too big to fail thing). If that were to happen, it would likely kill the capacity of community banks to lend to small businesses.
So if your money is safely in a community bank today, when the FDIC guarantee ends, what will you do? As you might expect, the Independent Community Bankers of America is lobbying for an extension, but the only thing certain in Washington these days is uncertainty. Moreover, most small-business owners are said to be unaware of the program’s pending demise. Now you know.
Meanwhile, across the pond in Britain, what appears to be an innovative idea to boost the British economy through small-business lending has surfaced and it’s a good one. In a nutshell, Britain’s proposal is to make about 80 billion pounds ($125 billion) worth of loans to small businesses and households in a move to boost the economy.
Dubbed “funding for lending,” the Bank of England would give banks cheap access to the funds, but only if the banks, in turn, lend the money to businesses and home buyers. Specifically, it ties the banks’ access to the plan directly to whether banks raise total lending to British firms and households. No increased lending means no access.
With signs the U.S. economy is sputtering and will continue to struggle this year, shouldn’t we be looking for new, innovative programs to spur a turnaround? Perhaps the Bank of England’s plan that essentially says “if you want access to lucrative funds, show us performance” is one innovative idea worth adopting. Let’s face it: so far the Federal Reserve’s program to buy up government bonds to keep interest rates low and increase lending hasn't exactly been a roaring economic success. Lending is still a huge problem in this country.
Moreover, a program like Britain’s would also help the small community banks and, perhaps, keep them in the small-business lending game regardless of the FDIC actions. Now that’s something we could live with.