05/21/2013 02:17 pm ET Updated Jul 20, 2013

Time for Bank Competition

With banks getting too big to fail, sopping up government bailout money and rejecting loans to small businesses, could it finally be time to give competition a chance?

Congress thinks so.

Last week, Senator Mark Udall (D-CO) reintroduced the Small Business Lending Enhancement Act of 2013 (S. 968). The bill would allow credit unions to provide additional loans to small businesses by raising the current credit union lending cap from 12.25 percent to 27.50 percent of assets. Earlier this year, Representative Carolyn McCarthy (D-NY) and Representative Ed Royce (R-CA) reintroduced a House companion bill, the Credit Union Small Business Jobs Creation Act (H.R. 688).

The current lending cap on credit unions was designed to protect banks from competition, and explains, in part, why banks account for 95% of the market share of small business lending. Until now, banks have lobbied hard and successfully to keep the caps in place, since competition would mean more choice and better rates for consumers and small businesses.

Access to capital is the single most important issue for small businesses today, and capital is necessary for a healthy and growing economy. While bank lending fell sharply in the last recession, credit unions increased lending by 40 percent, but the cap has suppressed expansion. Last year, the Small Business Administration reported that most bank loans were rejected and research showed that, compared to other businesses, small businesses were most adversely affected by the decline in bank lending. Credit unions would be a good option for small business startups, Keeping the cap only serves to protect banks from competition.

What is the economic benefit of raising the credit union lending cap? According to one report, the benefit would be worth 140,000 in new jobs and $13 billion in new investment. However, by my estimate, these direct effects will spur other benefits, sometimes referred to as multiplier effects, contributing $32.7 billion to Gross Domestic Product, $8.2 billion in new employment earnings and 188,000 additional jobs - both direct and indirect jobs. The point is that competition will yield sizable benefits to the economy. It is that simple.

Are their new risks? No. Compared to banks, credit unions did not require a bailout and their lending tends to have lower risk when compared to bank lending. For example, statistics show that credit unions have one-third of the delinquency rate and (relatively speaking) one-third of the bad debt. Moreover, if the credit union cap is increased, these economic benefits will occur without costing the public a single dime. How is that for an economic stimulus?

Maybe it is time for public policy to stop protecting competitors and start promoting competition.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research, an educational and research organization. For more information about the institute, visit