By Charles H. Green
If you’ve scanned the financial news over the past five years, in the wrangling over the Dodd-Frank Act, no more virulent objections were aired about any new regulations more that the Volcker Rule. This regulation, authored by former Federal Reserve Chair Paul Volcker, restricts banks from proprietary trading for their own account, meaning federally-insured deposits can’t be used to speculatively trade in the financial markets.
Who cares? All of the largest 100 or so banks that bought or built investment banking operations after the elimination of the Glass-Steagall Act to augment their commercial banking.
Connect the dots: SBA lending, among many other business lines, is about to get renewed dose of competitive pressure as these larger banks start searching for new sources of revenue to replace the lucrative business of trading equities.
Consider that 78% of all American bank deposits are held by only the largest 20 banks. The decks are already stacked against smaller banking companies with less than $500 million in assets. With a major source of revenue set to dry up in about 18 months, these larger banks will begin to scour the financial landscape for new places to deploy capital and SBA lending provides one of those opportunities.
In FY 2013, five of the top ten SBA lenders were among those top 20 bank. Wells Fargo has been an SBA participating lender for decades, but obviously in 2009, they became strategically focused on this channel and have chalked up almost $6 billion these loans since then.
Bottom line – for these very large banks, SBA lending is a budget decision that will have consequences on smaller banks already using the program. When they want this volume, it’s going to be hard to keep it away from them.
Takeaway – better start thinking strategically about how to defend your market share from lower priced competition and a 400-to-1 BDO advantage. They’re coming.