Financial Reform: Good for Small Biz?

Are small businesses lining up behind the financial reform bill being bandied about in Congress right now?

Not specifically. Small business groups have been hectoring banks for two years now to open its credit lines and start lending to small businesses again. But that hasn’t been happening, and the reform bill doesn’t fix that.

According to U.S. Treasury Department figures, major U.S. banks had cut business loan balances by $1 billion in October 2009 alone, and small business lending was down significantly for the entire year.

It also seems that banks have been arrogant about turning their backs on small business owners. From late April to the end of 2009, bank lending to small businesses fell by 11.6% according to filings with the Treasury Department. That has U.S. economic royalty seriously ticked off. Federal Reserve Chairman Ben Bernanke, in a speech in Chicago last week, took banks to task for not lending to small businesses.

"Business conditions for borrowers have worsened as well," Bernanke said. "Right now small business conditions are much tighter than anytime in recent memory. We need to find a balance that makes economic sense."

Banks should be "making good loans that are expected to be repaid," but "not be so conservative and restrictive that they turn away" credit-worthy borrowers, he added.

But given the fact that U.S. small businesses created 65% of all jobs in the past 16 years, you’d think that a big part of financial reform would be to ease credit and lending programs to small businesses.

You might also think that, by and large, the financial reform package might be friendlier toward small businesses. But plenty of economic experts beg to differ.

Mark A. Calabria, director of financial regulations studies at the Washington-based Cato Institute says portions of a key component of the reform bill — the development of a new Consumer Financial Protection Agency — could increase litigation costs for lenders. No doubt, banks will pass those costs down the line to small business borrowers, making it even tougher to get a loan.

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