E. Getter Specialist in Financial Economics
unions currently can make loans only to their members, to other credit unions,
and to credit union organizations. In addition, there are restrictions in
law on their business lending activities from which the credit union
industry has long advocated for relief. Specific restrictions on business
lending include an aggregate limit on an individual credit union’s member
business loan balances and on the amount that can be loaned to one member.
Industry spokesmen have argued that easing the restrictions on member
business lending could increase the available pool of credit for small
businesses. Community bankers argue that raising the business lending cap would
allow credit unions to expand beyond their congressionally mandated
mission and possibly pose a threat to financial stability.
Legislation has been introduced in the House and Senate to raise the business
lending cap for credit unions: H.R. 1418 and S. 2231, which are both
titled the Small Business Lending Enhancement Act of 2011. Currently, the
business lending cap for a credit union is 1.75 times of its actual net
worth or 12.25% of the total assets of the credit union, whichever is less. The legislation
would increase the cap to 27.5% of the total assets. A subcommittee of the
House Financial Services Committee has held one day of hearings on H.R.
Although “small business lending” appears in the bill title, the legislation
does not contain firm size or loan size restrictions. The Small Business
Administration (SBA) defines small-business loans as either commercial
real estate or commercial and industrial (C&I) loans that are under $1 million.
It also defines a small business as one with fewer than 500 employees. If the
bills were enacted as currently written, credit unions would be able to
make all C&I loans—those fitting the SBA definition and, in addition,
those greater than $1 million. Hence, the legislation would allow credit
unions to become larger competitors in the commercial lending market. It would
not limit credit unions to making only small-business loans or to
targeting their lending to small firms.
Although the legislation would allow credit unions to possibly become important
competitors with community banks, the differences in capital regulatory
requirements may not necessarily threaten financial market stability or
expose the National Credit Union Share Insurance Fund, which is the
federal deposit insurance fund for credit unions, to greater default risk. A
comparison of capital requirements presented in this report shows that
credit unions may hold less capital relative to banks for loans with
maturities of five years or less, but they must hold more capital for
loans of longer maturities.
Recent evidence pertaining to the demand for small business credit appears to
be mixed. Regardless of the current demand for credit, credit unions are
likely to be just as cautious as banks when granting commercial loans given
the slow pace of the U.S. economic recovery. Tight lending standards are
expected to persist until the macroeconomic outlook grows more favorable.
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