Small Bankers Under Regulatory Assault

Small banks matter a great deal to small businesses.  Therefore, business owners and entrepreneurs should be very concerned about the banks’ concerns with intrusive regulations that will reduce loans and raise the cost of capital.

As noted in an August 7 report in The Wall Street Journal, “Lenders with less than $1 billion in assets made up about 10% of industry assets as of the first quarter but made 37% of small loans to businesses and farms, according to research by the FDIC…”

Small businesses, therefore, should be concerned about the warnings being served up by small, community bankers on an array of regulatory measures that, in effect, would reduce the availability of credit.

As pointed out in the Journal story, executives at small banks are gravely concerned about new regulations linked to the Basel III international agreement. As reported, “Executives at many small banks complain that the rules could force them to cut back on loans to small businesses or homeowners.”

Specifically, worries swirl around the following: “Many are particularly upset about the complex system of determining how much capital a bank must hold against mortgage loans they make… The practical result is that many of the mortgages these banks make will require significantly more capital than they do now, for loans that community bankers say aren’t high risk because of their personal relationships with borrowers. The complexity of tracking and calculating capital requirements under this system is also a burden for smaller banks, they say. And the Basel rules come as a number of Dodd-Frank changes hit them, including mortgage standards being written by the Consumer Financial Protection Bureau.”

In its July 2012 “Current Top Issues” report, the Independent Community Bankers of America summed up the Basel III issue this way: “ICBA is deeply concerned with the new proposed capital standards issued under Basel III. The regulators’ proposed rules would increase capital requirements and impose more complex regulatory standards on all banks regardless of asset size. While community banks typically maintain the highest levels of capital in the banking industry, the more complex standards could limit lending and credit availability in Main Street communities.”

And ICBA analyses are full of warnings about problems with Dodd-Frank and the CFPB.

For example, in a statement submitted for the record to the House Small Business Committee, the ICBA noted the high costs of implementing various CFPB rules. It declared: “Finally, ICBA is concerned that the scope of the changes being considered by the CFPB have the potential to cause significant costly IT upgrades and changes to bank loan origination, document preparation, and core operating systems. These costs could drive many small banks to exit the mortgage lending business, even for loans held in portfolio, which will severely restrict credit in many rural areas. Those community banks that do remain in the business will likely have to increase their prices to cover these costs. These costs for items that add no value or protection to the consumer will end up increasing the cost of credit and reducing the availably of credit.”

The ICBA also summed up the problems with price controls being set on interchange fees: “While the Federal Reserve’s final rule capping debit interchange rule (effective October 1, 2011) and the network exclusivity rule (effective April 1,2012) implementing the Durbin amendment to the Dodd-Frank Act were a significant improvement over the December proposed rule, they remain a serious concern. ICBA strongly supports legislation introduced by Reps. Jason Chaffetz (R-UT) and Bill Owens (D- NY) to repeal the Durbin amendment and will work to advance it. At the same time, ICBA is focused on the networks’ implementation of the rule and the impact of the rule on community banks and other exempt issuers. ICBA is opposing further legislation to regulate credit card interchange, either through tampering with antitrust laws or undoing existing pro-consumer network operating rules, which would put community banks at a competitive disadvantage to larger institutions with national footprints. Merchants want to pay less for the benefits they receive by accepting payment cards, and their efforts to regulate interchange would mean fewer choices and higher costs for consumers.”

Points made at a House Financial Services subcommittee hearing focused on the costs of new rules and regulations on small banks.

For example, as reported by TheHill.com, Charles Hageboeck, the president of City National Bank, said in his testimony, “The flood of regulations emanating from Dodd-Frank is so large that bank regulators have been urging banks to add compliance officers to handle it. And despite claims that community banks like mine would be exempt from the new Consumer Financial Protection Bureau, we are not exempt. All banks — large and small — will be required to comply with the rules and regulations set by the CFPB. Given that the cost of compliance has a disproportionate impact on small banks as opposed to large banks, it is reasonable to expect this gap to widen even more as Dodd-Frank is fully implemented.”

According to BankCreditNews.com, William Loving, the president and CEO of Pendleton Community Bank, observed, “I can’t think of one aspect of our bank that is not touched by regulation. My staff spends more time on regulatory compliance than it did before 2008. I can assure you our bank did not have anything to do [with the recent financial collapse]. Every dollar spent on compliance is not loaned to customers. Every dollar the staff spends on compliance is not spent on customer service.”

The regulatory assault on small banks is costly in a variety of ways, and is bad news for small businesses, individuals and families needing affordable credit, and therefore, bad news for the economy.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is Root of All Evil? A Pastor Stephen Grant Novel.

Energy Success Story for the Economy

Sometimes one just needs to step back to gain, or regain, perspective.

We hear about how the Marcellus Shale natural gas field, covering parts of Ohio, Pennsylvania, West Virginia and New York, has changed the energy equation in the U.S.  A look at the latest numbers and projections drives home the point.

In an August 5 Associated Press story, it was noted, “In 2008, Marcellus production barely registered on national energy reports. In July, the combined output from Pennsylvania and West Virginia wells was about 7.4 billion cubic feet per day, according to Kyle Martinez, an analyst at Bentek Energy. That's more than double the 3.6 billion cubic feet from last April, and represents over 25 percent of national shale gas production.”

The report goes on to note that experts estimate that Marcellus has passed the Haynesville region in Arkansas and Texas as the top natural gas producing region.

For good measure, there are plans for Shell Oil to “build a petrochemical plant to turn Marcellus gas into other consumer and industrial products including plastics,” and several pipeline expansions in the region will allow for increased production and easier transport of gas to other parts of the northeast.

That’s good news for the region’s economy, as well as for energy costs. The AP noted: “The current wholesale price of natural gas is about $3 here, but $12 or more in Europe and Japan.”

And the U.S. Energy Information Administration (EIA) points out, “Of the natural gas consumed in the United States in 2011, about 94% was produced domestically; thus, the supply of natural gas is not as dependent on foreign producers as is the supply of crude oil, and the delivery system is less subject to interruption. The availability of large quantities of shale gas should enable the United States to consume a predominantly domestic supply of gas for many years and produce more natural gas than it consumes.”

Indeed, looking ahead, the EIA “projects U.S. natural gas production to increase from 21.6 trillion cubic feet in 2010 to 27.9 trillion cubic feet in 2035, a 29% increase. Almost all of this increase in domestic natural gas production is due to projected growth in shale gas production, which grows from 5.0 trillion cubic feet in 2010 to 13.6 trillion cubic feet in 2035.” Also, keep in mind that, as the EIA points out, “Many shale formations, particularly the Marcellus, are so large that only a limited portion of the entire formation has been extensively production-tested.”

What about the impact on the economy, industries and jobs? In a March 2012 report, API summed up: “Development of shale resources supported 600,000 jobs in 2010. The number of direct and indirect jobs is constantly increasing. Affordable, domestic natural gas is essential to rejuvenating the chemical, manufacturing, and steel industries. The American Chemistry Council determined that a 25 percent increase in the supply of ethane (a liquid derived from shale gas) could add over 400,000 jobs across the economy, provide over $4.4 billion annually in federal, state, and local tax revenue, and spur $16.2 billion in capital investment by the chemical industry. They also note that the relatively low price of ethane would give U.S. manufacturers an essential advantage over many global competitors. Similarly, the National Association of Manufacturers estimated that high recovery of shale gas and lower natural gas prices will help U.S. manufacturers employ 1,000,000 workers by 2025 while lower feedstock and energy costs could help them reduce natural gas expenditures by as much as 11.6 billion by 2025. America’s Natural Gas Association (ANGA) estimates that lower gas prices will add an additional $926 of disposable household income annually between 2012 and 2015, and that the amount could increase to $2,000 by 2035.”

Small businesses across industries, obviously, benefit from enhanced economic growth and lower natural gas costs. But the small business role in specific energy industries should be noted as well.

For example, according to the latest Census Bureau data, 55% of employer firms in the “pipeline transportation of natural gas” industry had fewer than 20 employees, and 69% less than 500 workers.

In the “natural gas liquid extraction” industry, 53% of firms had less than 20 workers, and 70% fewer than 500 employees.

And among “natural gas distribution” firms, 65% had less than 20 workers, and 84% fewer than 500 employees.

So, the natural gas business is, to a significant degree, about small businesses.

The recent, dramatic and beneficial change in shale gas production has been due to advancements in technology, specifically, the combination of horizontal drilling with hydraulic fracturing.

Of course, though, environmental activists who do not like the use of any kind of carbon-based energy have opposed expanded natural gas production. It is important that policymakers in the states and at the federal level keep their focus on regulations that are rooted in sound science, rather than based on mere assertions, and that do not impose unnecessary burdens.

For example, questions loom large on the regulatory situation in New York. Consider the following points made by the Independent Oil & Gas Association of New York: “The New York Times published an article on June 13 quoting a senior official within the Department of Environmental Conservation (DEC), who said Governor Cuomo’s administration planned to limit the initial permitting of horizontal gas wells to select communities in the Southern Tier. Further, the article noted that local municipalities would initially have control over whether to allow natural gas development within their communities.” The New York IOGA has said that “any progress is a positive step forward. And while we stand by that position to a certain degree, we also have an obligation to share the viewpoint that such limitations, which are not based on scientific data, is inappropriate and not in the best interest of our members, the Southern Tier economy and the entire state.”

The New York IOGA added, “The administration, including the DEC, is well aware that we will accept reasonable regulations and permit guidelines, but we also want state leaders to understand that a plan such as the one outlined in various follow-up reports is unsustainable on a large scale.” Quite simply, the IOGA was spot on in pointing out that developers “will not invest in a state where there is: regulatory uncertainty; an inconsistent patchwork of local laws; and unreasonable and expensive obstacles.”

That warning applies to New York, to other states and to the nation. The U.S. – particularly at the federal level – has done a great deal to undermine domestic energy production. Such misguided policymaking needs to be avoided. That goes for all production, from offshore oil drilling to natural gas production in areas like the Marcellus Shale.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

“SHARING” INNOVATION: THE NEW NORM?

The future of wireless is uncertain. Will we move toward ever-faster speeds, better and more powerful apps, and increased job growth for our economy? Or, will wireless innovation and development stagnate due to increasingly crowded airwaves and a government that dithers rather than acts to solve the problem?

The Information Technology and Innovation Foundation held an event on Capitol Hill last week, where presenters provided a stark choice for the United States. Panelists from the wireless sector, Congressional staff, the Administration and the app development community discussed a report issued recently by the President’s Council of Advisors on Science and Technology (PCAST).

The report proposed that “sharing” federal spectrum – rather than clearing it, allocating and auctioning it for commercial consumer use, as has been done for well over a decade – should become the “norm.” At first this sounds good. After all, didn’t your parents always tell you to share? However, there’s a real danger in this approach. For many reason, spectrum sharing will slow the process of getting spectrum into the hands of consumers and businesses.

It hasn’t been “shared spectrum” that has given us the tremendous growth and innovation in the wireless ecosystem. Private investment not “sharing” has, for example, created an apps economy that didn’t even exist until 5 years ago. It now employs over 500,000 workers. The investment of today’s wireless carriers, who could count on spectrum exclusive licensing, has revolutionized our mobile economy. It’s been regulatory and business certainty that has allowed AT&T and Verizon to rank #1 and #2 in American investment.

Although spectrum sharing could potentially be one of many options for carriers down the road, the report noted that the scope and scale of the technology for bringing spectrum sharing to practical fruition was decades away. We can’t wait.

In 2010, President Obama promised that the government would make 500 megahertz of spectrum available for commercial consumer use -- spectrum that network operators will put to work to provide the highest speed access to the wireless broadband Internet, everything from streaming videos to new medical applications to career and educational opportunities.

The PCAST report, however, sent a depressing message to investors, to the private sector and to American consumers: we know you need spectrum, but you have to do it “our” way. You have to share spectrum with the federal government, with the government deciding when you get to use spectrum, and when you can’t. Oh, and spectrum sharing doesn’t work yet. Talk about uncertainty.

Rather than the untested, speculative technologies of the PCAST report, we need the certainty of a method of obtaining spectrum that works. Part of what has proven to work is quick approval of secondary market transactions that allow carriers to purchase spectrum in the free market and put it to use now for consumers.

In addition, we need the Administration to follow through on the proven model of clearing, allocating and auctioning spectrum and then act on its promise of 500 MHz of clearly useable, exclusively licensed spectrum for commercial consumer use now.

Let’s use the tools we have to get the job done so hundreds of millions of Americans can benefit more fully from the wireless revolution. This revolution will generate millions of new jobs in all areas of the economy.

A President running for reelection should want to focus on jobs and economic growth – shouldn’t he?

Karen Kerrigan is President and CEO, SBE Council

Productivity Improves, But Still Under-Performs

Productivity for 2011 and in the first quarter of this year was, quite simply, poor. The numbers released on August 8 for the second quarter of 2012 were better than the first quarter, but still not exactly robust.

Keep in mind that we’re talking about nonfarm business sector labor productivity. This output per hour is calculated by dividing an index of real output by an index of hours worked.

Post-World War II, labor productivity growth has averaged 2.2 percent. But productivity only grew by 0.7% in 2011, and by -0.5% in the first quarter of 2012 (annualized rate) and 1.6% in the second quarter. That 1.6% increase reflects 2.0% output growth and a 0.4% increase in hours worked.

Productivity improved strongly in 2009 and 2010, which was a requirement given the down economy and lost jobs. The last time that the U.S. combined solid real GDP growth with strong productivity growth was in 2004. We also saw that combination in the late 1990s and mid-1980s. The ideal scenario is to experience strong GDP and productivity growth. But that certainly has not been the case in recent years.

In the end, productivity matters a great deal to both businesses and workers. Enhanced productivity obviously benefits business owners, boosting their bottom lines. And it’s good for workers, whose incomes ultimately are tied to their level of productivity.

Looking ahead, labor productivity is tied to business investment. Indeed, contrary to popular assumptions, there is no conflict between labor and capital. They need each other, and that includes capital investment that makes labor more productive. To boost both GDP and productivity growth, the U.S. needs to remove uncertainties and reduce costs – thereby, enhancing incentives for – private sector risk taking, namely, entrepreneurship and investment.

Raymond J. Keating

Chief Economist

SBE Council

Keystone XL Needed Now More than Ever

The American people understand the benefits of the Keystone XL Pipeline. Unfortunately, the Obama administration continues to play politics with this important energy project.

On the positive side, the southern portion of the pipeline project – running from Cushing, Oklahoma, to the Gulf of Mexico (now being called the Gulf Coast Project) – finally received its final permit to move ahead.

In a statement, Russ Girling, TransCanada's president and chief executive officer, said, “Receiving this final, key Army Corps permit for the Gulf Coast Project is very positive news. TransCanada is now poised to put approximately 4,000 Americans to work constructing the $2.3-billion pipeline that will be built in three distinct 'spreads' or sections. The Gulf Coast Project will contribute millions in property taxes to counties in Oklahoma and Texas, money that can be used to build roads, schools and hospitals.”

But the real news remains that TransCanada is still waiting on the Obama administration to make another decision on the 1,179-mile part of the pipeline project that would run from Hardisty, Alberta to Steele City, Nebraska. This would bring both Canadian and North Dakota crude oil to Gulf Coast refineries.

Recall that President Obama rejected the project in January, siding with green extremists who oppose all carbon-based energy and also happen to be part of the President’s political base. At the same time, so as to not alienate another part of his base, i.e., labor unions that support the project, the White House invited TransCanada to reapply for approval with a slightly altered path. TransCanada did reapply in May.

This project should be a no-brainer. Multiple years of review by the State Department gave a thumbs up on the environmental front. The project would generate significant jobs – as noted above by the TransCanada CEO. Estimates put the boost in U.S. employment from the 80,000 jobs supported by existing oil sands projects in 2010 to 179,000 jobs in 2035, with a potential for as many as 600,000 by 2035. For good measure, this means expanded oil for U.S. refineries, and an increase in oil supplies from reliable sources.

As noted by API Refining Manager Cindy Schild, “There is no reason to further delay this critical jobs and national security project. With high unemployment and continued instability in the Middle East – approval of this pipeline will help our economy and help put our energy future back into our own hands.”

In a statement, TransCanada added: “The pipeline will transport growing supplies of U.S. crude oil to meet refinery demand in Texas. Gulf Coast refineries will be able to access lower-cost domestic production and avoid paying a premium to foreign oil producers, reducing cost and the United States' dependence on foreign crude oil.”

The American people understand the potential benefits. A Washington Post poll released on July 1 asked if the U.S. government should approve the pipeline project. Among adults in general, 59% said yes and 18% no, and among registered voters, it was 62% in the yes column and, again, 18% no.

Small business owners, perhaps more so than anyone else, understand the need for affordable, reliable energy, as they struggle in a tough economy while figuring out how to wrestle with high and uncertain energy costs.  In an April 2012 survey conducted by SBE Council, 72% of small business owners said high energy prices were impacting their firms – a shocking 43% said if gas prices remained high or shot higher the survivability of their business was at stake.

It’s time for the Obama White House to push aside the politics, and do something positive for the U.S. economy by approving the Keystone XL Pipeline project.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

SBE Council Chief Economist: Latest Jobs Data Stoke Deep Worries About Entrepreneurship and Economy

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), released the following statement in response to the July employment data reported by the U.S. Bureau of Labor Statistics:

"The latest jobs report is bad news when you look at the data that matter most when it comes to the state of our economy and job creation.

"The establishment survey payroll numbers pointed to employment growth of 163,000. While at least positive, those numbers are far below where they should be during an economic recovery, such as in the neighborhood of 250,000.

"But the real story lies with the household survey, which better captures start up and small business activity, and is the survey from which we get the unemployment rate. The news here was all unequivocally bad.

"The labor force actually fell by 150,000, with the labor force participation rate declining and remaining at nearly three-decade lows. The discouragement of workers persists.

"Employment actually declined by 195,000, with the employment-population ratio also at near-30-year lows and the unemployment rate ticking up to 8.3 percent. Businesses simply are not creating jobs, being discouraged by uncertain and costly public policies relating to taxes, regulations, and government spending, for example.

"There's really nothing positive to latch onto here. Instead, the numbers only stoke more worries about the state of entrepreneurship and our economy."

KEY VOTE FOR SMALL BUSINESS: A Pathway to Comprehensive Tax Reform in 2013, H.R. 6169

SBE Council sent this KEY VOTE letter to all members of the U.S. House today regarding the vote on the "Pathway to Job Creation through a Simpler, Fairer Tax Code Act of 2012."  Entrepreneurs are sick and tired of the continued "talk" about tax reform. They want action!

August 2, 2012

Dear Member of the U.S. House of Representatives:

The Small Business & Entrepreneurship Council (SBE Council) strongly supports the Pathway to Job Creation through a Simpler, Fairer Tax Code Act of 2012, H.R. 6169. America’s entrepreneurs and small business owners want a simple and less burdensome tax system. It needs to be globally competitive in order to promote growth and encourage investment. The time has come to stop talking about comprehensive tax reform. It is time to take action. H.R. 6169 provides a clear pathway to comprehensive tax reform in 2013.

Fixing the tax system is one of the most important steps Washington can take to assist business growth and entrepreneurship. The accelerated procedures included in H.R. 6169 to bring a tax reform bill to a vote in the House and Senate are needed. SBE Council strongly supports the specific tax provisions that provide the framework for the bill, which include:

• Consolidation of the current six individual income tax brackets into two, of rates not more than 10% and 25%
• A corporate tax rate of not more than 25%
• Repeal of the Alternative Minimum Tax (AMT)
• A broadening of the base to maintain an 18%-19% of GDP revenue level
• A move to a territorial system from our current worldwide system

Entrepreneurship and small business growth would surge under such a system. If the U.S. is to move back to robust levels of investment, job creation, entrepreneurship and economic growth, the tax system must be stable and globally competitive. Americans, and most certainly entrepreneurs, are eager for Washington to act on tax reform. H.R. 6169 is a crucial and welcome legislative step.

SBE Council will KEY VOTE H.R. 6169 as a vote for small business in its forthcoming Ratings of the 112th Congress. Thank you, in advance, for your support of America’s small business owners and entrepreneurs.

Sincerely,
Karen Kerrigan
President & CEO
Small Business & Entrepreneurship Council (SBE Council)

FED WATCH: Keating Comments on Latest FOMC Statement

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following response to the Federal Open Market Committee’s statement on August 1:

“The FOMC’s statement today was more of the same. The Fed effectively warned that economic and employment growth would continue to under-perform for the foreseeable future, and Bernanke & Company would continue running loose money.

“So, the message is that the economic fiction the Fed has been operating under for four years now will persist. It’s the Bernanke Fed’s misguided policies, and they’re sticking to them.

“The reality, of course, is that the Fed’s previously unimaginable expansiveness on monetary policy has done nothing to strengthen this anemic recovery. And no reasons exist to think that even more easing by the Fed will help growth.

“Instead, loose monetary policy has only created negatives and uncertainties regarding the dollar and inflation. Entrepreneurs and investors continue to face nothing but negatives and uncertainties on the policy front – from worries over taxes, regulations and government spending on the fiscal side to the actual and potential grim consequences of loose money.

“Among those consequences of such expansive monetary policy, by the way, are higher energy costs given that oil is priced in dollars. When the value of the dollar and inflation are concerns, that serves to push oil prices higher than they otherwise would be.

“A shift to sound monetary policy focused on price stability would be a welcome change for small businesses and the economy, but the Bernanke Fed is uninterested in shifting policy in such a direction.”

A Vote for Globally Competitive Tax Rates and Comprehensive Tax Reform, H.R. 6169

Today, the U.S. House will vote on H.R. 6169  -- a bill that forges an accelerated path for the consideration of comprehensive tax reform in 2013. The measure would implement expedited procedures to enable lawmakers in both the House and Senate to overcome technical barriers that often cause bills to languish during the legislative process. 

Last week, SBE Council Member Todd Flemming, along with other small business owners, all agreed at a House Small Business Committee hearing that fixing the tax system was the single most important thing Washington can do to assist business growth and entrepreneurship.

 

In order for the expedited procedure to kick in, the legislation must be introduced by April 30 of next year and include the following:

Consolidation of the current 6 individual income tax brackets into 2, of rates not more than 10% and 25%

A corporate tax rate of not more than 25%

AMT repeal

A broadening of the base to maintain an 18%-19% of GDP revenue level

A move to a territorial system from our current worldwide system

All of these provisions are critical to making the U.S. tax system more globally competitive.   Both corporate and individual tax rates are much too high, and compliance is costly and burdensome.  If the U.S. is to move back to robust levels of investment, job creation and economic growth the tax system must be stable and globally competitive.

SBE Council will KEY VOTE H.R. 6169 as a vote for small business in its forthcoming Ratings of the 112^th Congress.  

Yesterday, the U.S. House passed H.R. 8.  The legislation would extend current tax rates for all income levels and preserve the 35% estate tax rate and $5.12 million indexed exemption through 2013 (the death tax will surge to a top rate of 55% and a meager $1 million exemption at year end).  The bill passed by a vote of 256-171 -- 237 Republicans and 19 Democrats supported the bill, while 170 Democrats and 1 Republican opposed it. 

Karen Kerrigan, President & CEO