Banks Not Complying with Community Reinvestment Act – Small Business Credit Denied

Banks Not Complying with Community Reinvestment Act – Small Business Credit Denied

by January 29, 2018

Access to small business credit is a major contributor to local economies and job creation, but hey are still economically depressed several years after the end of the U.S. financial crisis that started in 2008.

The research published by the U.S. Small Business Administration, is the first rigorous analysis of how the financial crisis affected small business credit and lending to small U.S. businesses. It provides insights into the small-business credit market and how to tailor legislation, regulations and taxes to help small businesses obtain loans for growth

According to a small business credit study by Florida Atlantic University College of Business:

“There’s been a big rebound in lending to big businesses, but there’s been a very small recovery in lending to small businesses,” said Rebel Cole, Ph.D., author of the study and the Kaye Family Endowed Professor in Finance at FAU. “The repercussions of this are huge. Small businesses account for about half of all private sector employment, about half of all net job growth and about half of gross domestic product.”

How to tailor legislation, regulations and taxes to help small business credit

small business credit has remained weak, growing at only about 2 percent per year while total-business lending expanded at 4 percent.

The decline in small-business loans has been much sharper at large banks rather than at small banks and at troubled banks rather than at healthy banks.

“Banks that are well-capitalized make more small-business loans, and big banks by their nature like to hold less capital,” Cole explained. “Not surprisingly, there’s a tremendous decline in small-business lending by banks that are in trouble.”

Post-crisis lending has disproportionately gone to large businesses. The study found that large banks lent a smaller portion of their assets to small businesses than did small banks, and that large banks also severely curtailed their small business credit following onset of the financial crisis.  Cole said regulators could use existing laws, such as the Community Reinvestment Act, to encourage more small business credit by these very large banks. Another option is for legislators and regulators to pass legislation and take other steps to limit the ongoing concentration of banking sector assets in the hands of just a few large players.

The study’s evidence also supports proposals by U.S. banking regulators to raise minimum capital ratios to levels where they are binding constraints for large banks. The study also suggests that regulators should take steps to encourage the formation of more de novo community banks, which are specialists in small-business lending. Additionally, legislation and policies to reduce the regulatory burden on small banks by exempting them from regulations aimed at curbing the excesses of large banks would be helpful according to Cole.

The study’s author also believes that recent changes to small-business loan limits on the almost 6,000 U.S. credit unions should encourage growth of small-business lending. From 2008 to 2016, credit union lending to small businesses has more than doubled to more than $60 billion, while bank lending to small businesses over the same period has declined by almost $100 billion.

“If small businesses can’t get credit, they don’t grow,” Cole said. “They can’t hire people, they can’t invest in new plant equipment, so the economy can’t grow. That’s one big reason we’ve had such an anemic recovery since the financial crisis is the small business sector has been constrained.”

– FAU –

About Florida Atlantic University Florida Atlantic University, established in 1961, officially opened its doors in 1964 as the fifth public university in Florida. Today, the University, with an annual economic impact of $6.3 billion, serves more than 30,000 undergraduate and graduate students at sites throughout its six-county service region in southeast Florida. FAU’s world-class teaching and research faculty serves students through 10 colleges: the Dorothy F. Schmidt College of Arts and Letters, the College of Business, the College for Design and Social Inquiry, the College of Education, the College of Engineering and Computer Science, the Graduate College, the Harriet L. Wilkes Honors College, the Charles E. Schmidt College of Medicine, the Christine E. Lynn College of Nursing and the Charles E. Schmidt College of Science. FAU is ranked as a High Research Activity institution by the Carnegie Foundation for the Advancement of Teaching. The University is placing special focus on the rapid development of critical areas that form the basis of its strategic plan: Healthy aging, biotech, coastal and marine issues, neuroscience, regenerative medicine, informatics, lifespan and the environment. These areas provide opportunities for faculty and students to build upon FAU’s existing strengths in research and scholarship. For more information, visit

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