Elizabeth Warren: Why Credit Is Still Frozen

The congressional TARP watchdog says there's no evidence that the $700 billion bailout boosted lending to small business

You report that after Treasury infused capital into banks, most recipients decreased their small business lending rather than increasing it. Why?

Wall Street banks cut back small business lending by 9 percent, more than double their 4 percent cutback in overall lending. Small business lending is expensive. It falls between consumer lending, which is driven almost entirely by numbers like credit scores or Zip Codes and pays off in volume, and large business lending, which is very much about relationships but pays off in very large fees per transaction. Small business lending has proportionally more expense associated with each loan.

Treasury is proposing a measure to provide smaller banks with $30 billion to get them to lend more to small companies. Will this do more to increase credit than the Troubled Asset Relief Program did?

What the Secretary of the Treasury now proposes is not a TARP program. It would require new authorization from Congress. But it continues to follow the same basic TARP pattern: Put money into banks, and they will lend it. The legislation would add some incentives to make the borrowed money cheaper if it's loaned to small businesses, but it's not clear that those incentives will be strong enough.

Even if small banks do start lending more, can they make up for the contraction by the largest banks?

Our economy increasingly must rely on small banks to fund small businesses, but many of those same small banks are themselves in trouble. Commercial real estate loans have left huge holes in the balance sheets of many of these banks, and there's more trouble on the horizon. Frankly, I'm worried.

Some banks argue that lending is constricted because regulators are pressing them to reduce the risk on their books. Do you agree?

Banks have to show that they're strong, and if they're not strong, then the regulators are right to press them to reduce risk. Banks complain about their regulators, but the banks are not going to get structurally stronger from looser regulations. Right now there are no data that suggest the regulators are too tough.

You say Treasury doesn't have good data on small business lending.

The data were terrible even before the crisis—very little information was collected. TARP presented an opportunity to require much more granular reporting from the banks that took taxpayer money, but Treasury didn't ask for it. We pointed this out early and often, but no changes were made. Now, policymakers are flying blind because they failed to collect data on many aspects of how lending shifted when the financial crisis hit.

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