House Committee on Small Business: Unleashing Main Street’s Potential: Examining Avenues to Capital Access
House Committee on Small Business
Unleashing Main Street’s Potential: Examining Avenues to Capital Access
Topline
- Members from both parties questioned the impact of Basel III on small businesses and community banks.
- Members from both parties discussed ways to increase access to capital for small businesses.
Witnesses
- Kevin O’Leary, Chairman, O’Leary Ventures
- Jill Bommarito, Founder & CEO, Ethel’s Baking Co.
- Douglas Holtz-Eakin, President, American Action Forum
- Everett Sands, Founder & CEO, Lendistry
Opening Statements
House Small Business Committee Chair Roger Williams (R-Texas)
In his opening statement, Williams discussed how America’s small businesses are facing threats on multiple fronts, including record-high inflation and labor shortages. He emphasized that now is not the time to restrict access to capital. Williams explained that high interest rates and tightening lending standards are unfairly targeting entrepreneurs with little credit and keeping them out of the market. He warned that the proposed Basel III requirements would require banks to hold their capital on the sidelines and target small business owners with thin credit histories. Williams concluded that Basel III would force start-ups to look to venture capital firms instead of banks, which will put the entire economy at greater risk.
House Small Business Committee Ranking Member Nydia Velazquez (D-N.Y.)
In her opening statement, Velazquez emphasized that Congress must ensure that all of America’s small businesses have access to credit before noting that Black and Latino businesses struggle to gain access to venture funding. She said the SBA’s capital access programs are essential to bridging the gaps in accessing credit for women and minority owned small businesses. Velazquez emphasized that we want to make sure that banks are well capitalized and explained that Basel III is just a proposed rule that is continuing to be modified based on feedback. She concluded that community banks will not be affected by Basel III, leaving them open to extend credit to small businesses.
Testimony
Kevin O’Leary, Chairman, O’Leary Ventures
In his testimony, O’Leary affirmed that access to capital at low cost is vital for small businesses to grow and make payroll for their employees. He criticized the government’s policy of bailing out large failing banks after the financial crisis while raising lending requirements for community banks. O’Leary cited that small businesses provide 60 percent of jobs in the U.S. but they do not have the lobbyists and staff to access the programs within the Inflation Reduction Act and laws, putting them at a unique disadvantage. He added that the Inflation Reduction Act and the CHIPS Act were written for foreign corporations and presented the question that if small businesses are responsible for 60 percent of the jobs, why are these acts not written to provide 60 cents of every dollar to small businesses. He then said Congress should pass a Payroll Protection Program to protect workers during the consolidation of regional banks. O’Leary urged Congress to work with the agencies implementing the IRA and CHIPS to ensure that small businesses have access to funding.
Jill Bommarito, Founder & CEO, Ethel’s Baking Co.
In her testimony, Bommarito emphasized the importance of access to capital for small business owners and explained how without two years of demonstrated profitability, small businesses are forced deplete personal savings, use credit cards or high interest loans, or to look to family members and friends to finance their small businesses. She noted that when small business owners cannot access capital, they are forced to choose between liquidating retirement accounts or selling off more equity. Bommarito warned that the Basel III endgame will keep small businesses from accessing capital and will push entrepreneurs to predatory lenders. She urged Congress to oppose the Basel III Endgame rule and modernize the SBA through reauthorization.
Douglas Holtz-Eakin, President, American Action Forum
In his testimony, Holtz-Eakin discussed the two current threats facing the capital market for small businesses – limited access to capital due to high interest rates and the prospect of slow economic growth over the near term. He criticized the Biden Administration for imposing a total regulatory burden of $150 billion a year for small businesses. Holtz-Eakin said the Basel III endgame provides no quantitative justification for its regulations on capital, and challenged regulators to make a case for why it should be enacted. He concluded that instead of relying on tax increases, Congress should focus on keeping its own house in order and extending the pro-growth aspects of the 2017 tax cuts.
Everett Sands, Founder & CEO, Lendistry
In his testimony, Sands said that while small businesses need access to capital to grow through small-dollar loans, regulatory hurdles have kept capital from reaching minority-owned businesses. He urged Congress to move from the state-by-state licensing model that prevents CDFIs from distributing capital to a federal licensing model. Sands also recommended that Congress should increase access to the Federal Home Loan Bank to provide cheaper capital to CDFIs, which can then pass low-interest loans on to underserved communities. He concluded by recommending that Congress create a task force to conduct regular reviews of programs that deploy capital in innovative sectors such as renewable energy.
Question & Answer
Basel III Endgame
Williams asked if there any cost-benefit analysis was done on the Basel III Endgame proposal. Holtz-Eakin said no.
Rep. Blaine Luetkemeyer (R-Mo.) asked if it’s true that Basel III will only affect the largest banks. Holtz-Eakin said financial markets are interconnected and explained that his discontent with the rule is its operations risk requirements. He clarified that the rule doesn’t realize that operations costs will inevitably trickle down from the largest banks to smaller ones that provide credit to small businesses.
Rep. Chris Pappas (D-N.H.) asked how Basel III would impact rural banks and CDFIs. Sands said it’s important to ensure that all banks have access to liquidity but noted that we should recognize that we are in an inflationary environment and that the Basel III endgame proposal is not a good rule for the market at this time. Sands said that it’s clear that Basel III should be postponed and reviewed further.
Rep. Pete Stauber (R-Minn.) asked how the Federal Reserve could modify Basel III to make it workable to help small businesses. Holtz-Eakin said there is no reason for Basel III to be implemented as proposed. He explained that liquidity is not an issue, noting that banks are well enough capitalized at present and have passed stress tests. Holtz-Eakin recommended that if they want to tailor capital requirements, they should take things off and then in turn add the risk charges. He continued by saying he does not see the benefit of extending capital requirement increases to smaller banks and regional banks, saying that nothing in the proposal addresses the failures of First Republic Bank, Signature Bank, or Silicon Valley Bank.
Rep. Morgan McGarvey (D-Ky.) asked Sands if he predicted that his relationship as a CDFI would change with larger banks as a result of Basel III. Sands said the rollout of Basel III should be postponed to allow time to observe how CDFIs and small businesses will be affected.
Rep. Dan Meuser (R-Pa.) asked how increased capital reserve requirements in Basel III would impact small businesses. O’Leary explained that if Basel III were enacted today, it would shrink loan books by $500 billion in the first year.
Rep. Tracey Mann (R-Kans.) noted that many small businesses are farmers and ranchers and noted that derivatives are an important risk management tool for them. Mann then asked about the downstream effects on agriculture producers from Basel III. Holtz-Eakin commended a bipartisan letter that spells out the issue of derivative trading very clearly and said that nobody pays attention to the costs passed on to the small business. He urged Congress to revise the Regulatory Flexibility Act.
Rep. Jake Ellzey (R-Texas) asked why Basel III would make U.S. banks and credit markets less competitive. O’Leary said that there is competition in the world for capital and it looks for the path of least resistance to a place of safety. He then said the proposal would make places like Abu Dhabi more competitive for lending due to Basel III endgame’s massive, proposed liquidity requirements.
Rep. Marc Molinaro (R-N.Y.) asked how Congress can reorganize federal regulations to level the playing field for small businesses. Holtz-Eakin said Basel III endgame is the biggest issue facing small businesses. He added that he hopes capital requirements are not raised so dramatically, urging that regulators should defer the implementation of Basel III and stated they should not apply the rule to regional banks.
Access to Capital
Williams asked Bommarito how her capital needs changed as her business grew. Bommarito explained that a business needs capital to grow and cover its receivables, but the paradox is that increased lending is seen as riskier for investors, and small businesses need access to capital from community banks who are willing to take a chance on us.
Velazquez asked if the SBA’s 7A program would allow more access to capital for small business owners.
Bommarito said she utilized SBA loans in the past, but every bank she’s been in front of told her they do not want to do an SBA loan because of the time and regulations.
Pappas asked how to improve access to capital for rural small businesses. Sands suggested focusing on deploying lenders to rural areas through government programs and ending the state-by-state licensing regime for capital providers.
McGarvey asked why Holtz-Eakin disagrees that higher capital requirements equal more lending for small businesses. Holtz-Eakin explained that when faced with higher capital requirements, banks will inevitably raise interest rates and restrict who has access to capital.
Rep. Celeste Maloy (R-Utah) asked if it is true that many startups can’t get access to credit unless they have 3+ years of profitability. Bommarito said 78% of small businesses are worried about their ability to access capital due to rising interest rates. She noted that increased capital requirements are likely to drive that number even higher. Maloy then asked if these standards are appropriate to which each of the witnesses agreed that they are outdated and onerous.
Venture Capital Industry
Stauber asked about inflation’s impact on venture capital lending. O’Leary said there’s been a 39% reduction in venture capital lending over the last 24 months. He explained that it’s extremely difficult to raise capital in our inflationary economic environment. O’Leary said venture capital is currently dead as an industry and that many venture capital companies are at the point of deciding which companies in their portfolio they should no longer fund.
Stauber asked O’Leary about the differences in the venture capital market right now. O’Leary said start-ups are not getting access to capital right now. He explained that venture capital firms are waiting to see which businesses succeed on their own in this high-pressure economy.
Molinaro asked O’Leary what’s necessary for the long-term health of the venture capital industry. O’Leary replied that Basel III is bad policy, and said everyone needs to realize that it is bad policy.
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