As the Administration wrestles with how to get credit flowing to small- to mid-sized businesses, it encounters three significant problems.
First, government-guaranteed SBA loans--even in a more robust form--do not address the financing needs for the bulk of the small-to mid-sized businesses.
Second, smaller banks are under tremendous pressure from legacy problem loans. Problem loans negatively affect capital levels and liquidity, add regulatory pressure, and generally orient banks towards a "hunker down" or "play defense" mode. In addition, larger banks, despite announcements to the contrary, don't view small business lending as strategic and most non-bank lenders that historically focused on the sector still have no access to funding.
Finally, available TARP funds, which could help many banks feels more confident about lending, are so stigmatized that most bank management teams shun them.
The solution is to charter 100 new special "Business Banking Charters." These would be designed for banks that would aggressively participate in lending to small- to mid-sized companies. These new banks could be funded with a combination of private capital (from the hundreds of private equity firms trying to invest in banks) with a mix of TARP funds to make the private capital more attractive. They would have higher capital requirements to justify a concentration in business lending, they would have access to FDIC-insured deposits so they have a stable source of funds, and they would be regulated by a special group of examiners experienced in business lending so that they are properly monitored. As "business banks," they would be required to hold 80% of their assets in small- to mid-sized business lending activities--effectively the reverse of thrifts--which are required to have 80% of their assets in consumer loans.
New "business banks" would have no legacy problem loans and therefore solely focused on new loans, they would be attractive investments and attract private free market capital, and they would represent an entrepreneurial, free market solution to rapidly get credit flowing to small-to mid-sized businesses.