In an effort to restore a crucial segment of the economy that was wounded in the financial crisis, a former government official is starting a company aimed at helping small banks.
Lee Sachs, a former advisor in the Treasury department, is teaming with John Delaney, former chief executive of the bank CapitalSource, to launch a firm designed to allow small banks to make loans that otherwise would have been out of their league, the Wall Street Journal reports. By giving small banks opportunities to extend portions of big loans, the firm, called BancAlliance, will attempt to help revitalize the small bank industry.
Focusing on banks with assets between $200 million and $10 billion, BancAlliance will serve as a middleman, finding big loans and then allowing banks to underwrite pieces of them, the WSJ says. By collaborating, these banks could, in theory, compete with the giants of the banking industry.
Small banks have traditionally shared a close relationship with small businesses, making small lenders a key ingredient in a healthy economy. Small businesses crave the personal attention a small bank can provide. Especially now, with many banks shell-shocked from the crisis, small business owners, who might not have much concrete proof of reliability, can benefit from working with bank executives who trust them.
Small businesses contribute about 70 percent of the nation's jobs, according to the Obama administration's estimate. New businesses, which often rely on bank loans to get going, contribute about 20 percent of new jobs, according to a recent Bank of America Merrill Lynch study.
The health of small banks, then, is essential in a functioning economy. Late last year, the Federal Deposit Insurance Corp., which currently guarantees the savings parked at about 7,665 American banks, revealed that the number of banks it considers troubled swelled to 860 from 829 during the summer months. The vast majority of these additions to the "problem" list are small banks.
In theory, BancAlliance would help strengthen small banks by giving them access to loans outside their traditional sphere. While small banks typically have much of their assets tied to the local economy -- in commercial real estate, for instance -- this new company would theoretically let them expand their reach.
"This is designed to give large-bank capabilities to small banks," Sachs said, according to the WSJ.
It remains to be seen, though, whether BancAlliance would spur lending to small businesses.
Sachs is a Treasury veteran, having served as assistant secretary under Robert Rubin, during Clinton's second term. Under Rubin's watch, lawmakers rolled back Depression-era regulation, paving the way for banks to grow larger, a development that experts say contributed to the financial crisis less than a decade later.