The regulatory environment had a generally modest effect on the ability of community banks to make small business loans following the financial crisis, according to a new report.
However, the report also asserts that data reported to federal banking regulators makes it difficult to draw conclusions about the lending activity at the smaller banks, and modifications in how the data is reported has thus been recommended to federal regulators.
In a report issued Wednesday, the Government Accountability Office (GAO), the watchdog agency of the Congress, said that the data banks report to federal banking regulators have characteristics that make it difficult to determine how community banks’ small business lending changed since the end of the financial crisis in 2010.
To address those difficulties, GAO made recommendations to each of the federal banking regulators – the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) – urging them to “reevaluate, and modify as needed, the requirements for the data banks report in the Consolidated Reports of Condition and Incomes to better reflect lending to small businesses.”
GAO said it performed the study after it had been asked to assess the effect of regulatory changes since 2010 on community banks and small business lending, particularly after the “significant” rule changes made by regulators in the wake of the financial crisis. In its report, the agency said that the data banks report to regulators have characteristics that “make determining how community banks’ small business lending changed since 2010 difficult.”
However, GAO’s analysis found that the regulatory environment likely had a generally modest effect on various aspects of community banks and their small business lending. “GAO’s econometric models also found that community banks’ small business lending since 2010 can be explained largely by macroeconomic, local market, and bank characteristics, and that the potential effect of regulatory changes was likely modest,” the report’s summary states.
The report also estimated that most community banks made changes to their small business lending processes since 2010, most citing the regulatory environment as the primary reason for these changes. Those changes included, GAO said, the banks seeking more documentation from borrowers and taking longer to make loans. “Representatives of entities that assist small businesses were mixed on whether these changes affected small businesses’ ability to obtain loans,” the report stated.
Regarding community bank financial performance, the GAO report noted that “although many institutions reported increasing or reallocating staff and other resources to assist with regulatory compliance since 2010, GAO’s analysis suggests that the effect of these changes on profitability and customer service were likely modest.”
Community Banks: Effect of Regulations on Small Business Lending and Institutions Appears Modest, but Lending Data Could Be Improved