Bank Regulation

Congress, the administration, and bank and thrift regulators should be extremely cautious in considering short-term measures to encourage more liberal lending practices by insured institutions. Commercial banks remain the dominant suppliers of credit to small- and medium-sized businesses, which have become the main source of job growth in this country. According to the Census Bureau, most of the net increase in employment during the 1980s occurred in companies with fewer than 100 workers. In GAO's view, however, it would be imprudent to periodically weaken and tighten bank regulation in response to recession and inflation. This report identifies areas in which the regulatory burden on small business lending could be safely reduced. GAO summarized this report, along with proposed legislation that would ease the regulatory burden on safe, sound, and well-managed financial institutions, in testimony before Congress; see: Bank and Thrift Regulation: FDICIA Safety and Soundness Reforms Need to Be Maintained, by Donald H. Chapin, Assistant Comptroller General for Accounting and Information Management Programs, before the Subcommittee on Financial Institutions Supervision, Regulation, and Deposit Insurance, House Committee on Banking, Finance and Urban Affairs. GAO/T-AIMD-93-5, Sept. 23, 1993 (22 pages).

GAO found that: (1) bankers have become more conservative in small business lending because of economic considerations; (2) regulatory burdens related to real estate collateral and appraisal requirements have affected small business lending; (3) although recent interagency initiatives have attempted to increase small business lending by modifying supplementary collateral requirements for real estate appraisals, further clarification of appraisal evaluation guidelines is needed; (4) loan basketing has had a limited impact on small business lending; (5) the most effective way to reduce small business lending impediments is to place greater emphasis on internal controls evaluation and testing, since strengthened internal controls can help to reduce administrative burdens and financial risk and provide banks with incentives and flexibility to improve bank management; and (6) other factors that affect small business lending decisions include the regulations placed on banks, increased presence of nonbank lenders, and increased incidence of borrower bankruptcies and risks under environmental liability laws.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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