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Policy and California’s Economy (PACE) Briefing Series: Small Business & Community Banking
July 11, 2014

Santa Monica

RELATED CENTER: California Center

On July 11, the Milken Institute California Center convened the latest in its series of Policy and California’s Economy (PACE) briefings. Focused on issues affecting small businesses and community banking, the event continued conversations started at the Institute’s California Summit in November. At the Summit, Small Business Administration (SBA) Administrator Maria Contreras-Sweet pointed out that the low capitalization levels at community banks in California inhibit lending to small and midsized businesses. The July roundtable focused on recommendations for reducing the barriers to business lending and streamlining the ways banks rate small business risk.

The roundtable brought together community banking representatives, small business owners and advocates, and public officials. SBA Regional Administrator Donna Davis joined California Center Director Kevin Klowden in facilitating the session. Attendees discussed characteristics of California in relation to SBA District 9 (comprising California and other Western states), especially in terms of the large role small businesses play in California employment as well as the broad diversity among small business owners in the state (California small businesses owned by women, minorities, and veterans).

Initial discussion focused on the systemic elements contributing to limitations in local lending, along with other risk assessment hurdles faced by small businesses. These include a general lack of resources, such as the structuring, licensing and permitting assistance that small businesses need in advance of funding. This condition has been highlighted by the recent rise of nontraditional funding sources driven by the lack of traditional financing. According to the roundtable speakers, contributing to this dynamic are limitations based on the current risk assessment structure, which were characterized as restrictive and lacking the flexibility needed by small businesses hoping to grow.

Roundtable participants identified both top-down and bottom-up approaches for widening access to capital. They made three recommendations involving potential government action.

  1. Seek clarification concerning the procedural versus statutory requirements of local/community bank deposits.
  2. Assess the landscape and viability of existing small-business-oriented lending mechanisms (e.g., expand the Small Business Investment Co.’s offerings and other unlevered mechanisms to provide additional sources of capital).
  3. Develop campaigns to inform policymakers about the economic impact of small businesses and promote their multiplier effect in local communities.

Addressing additional regulatory hurdles impeding local lending, participants pointed to certain provisions in the Community Reinvestment Act (CRA) that limit local institutions’ ability to meet credit needs in certain communities. Pending CRA reform, it was suggested that the state may be able to assist local and community banks by providing structural support in overcoming geographic as well as other small to intermediate challenges. From a procedural standpoint, the roundtable encouraged the SBA, in relation to smaller community banks, to consider formalizing certain revisions to their standard operating procedures, allowing these banks to expand their ability to work with small businesses.

As discussed during the roundtable, these recommendations were intended as a starting point in improving the conditions that affect California’s small business environment. The California Center plans to continue this conversation in September by convening a broader group, including additional state, federal and community banking partners. At that session, we will focus group efforts on the elements that inhibit small business growth while discussing strategies and areas of potential policy reform for the California Center to pursue.