Editorial - Room with a View

Room with a View: raising the limit on investments in small businesses

Monday evening, the House passed H.R. 116 on a vote of 403 to 2. Entitled the “Investing in Main Street Act of 2019,” it raises the limit from 5% to 15% that federally-insured banks and savings-and-loans can invest in small businesses. That limit refers to the capital of the bank or savings-and-loan, and to loaning to a single small business.

Under current law (15 U.S. Code § 682), federally-insured First Foursquare Bank of Sand Berm — capitalized at $100,000 — can loan up to $5,000 to Nellie’s Flower Shop for, say, a new refrigerated display case to keep fresh flowers from wilting in the summer heat.

The limit, so I understand, is meant to ensure that First Foursquare Bank of Sand Berm has a nicely diverse investment portfolio that can withstand bumps and dips in the economy. One would expect the Bank to have a variety of outstanding loans up and down Main Street, helping to grow the local economy while keeping its depositors’ funds safe.

A grim pastime during the Great Recession was counting the number of weekly bank failures. I don’t relish a return of that game.

The proposed change would allow First Foursquare to loan Nellie’s Flower Shop up to $15,000. That might lead to fewer, larger loans and possibly a less robust defense against economic hard times. Or not.

Some might argue that in expensive locales (like California), a higher limit makes it easier on both the Bank and the Small Business to agree on a loan to cover meaningful investment in the business.

But that avenue is not blocked for the Bank — it just needs its own larger funding base. If First Foursquare Bank of Sand Berm is based in San Francisco, it needs a larger capitalization than if it’s based in Cheesehead, Wisconsin in order to adequately serve its business customers while preserving its own healthy investment portfolio.

History has shown that given license to act irresponsibly, a lot of people will do so. That includes bankers. The 5% cap on investing in a single business may seem low, but it enforces a minimal investment diversity with the goal of strengthening financial instutitions and guarding against the enthusiasms of loan officers. Skopos Labs, cited by GovTrack, gives this bill only a 4% chance of becoming law.

This bill was passed under suspension of rules, and received overwhelming support. It will now be sent to the Senate for consideration.