Innovation and Regulation, Both Need Data

Magic or Bird… DeNiro or Pacino… Mac or PC

What do all these things have in common? Nearly everyone will come down on one side of the debate citing some really compelling reasons; but at the end of the day neither has enough support for a conclusive determination.

You can find a lot of Op-Ed pieces over the last several months about the credit crisis and how it’s affecting mid-market and small business lending. And everyone from businessmen to politicians agree these are the companies that are going to drive most of the job growth and lead us out of the recession; but, there’s disagreement over exactly why they’re not borrowing and investing in growth.

The debate really boils down to a simple supply or demand issue. Some say that mid-market and small businesses are not borrowing because they’re nervous about the future and are not willing to take on the risk and costs of debt right now. Others say businesses want to borrow, but that banks are only willing to invest in the very lowest risk companies.

To make the issue more complex, those who say banks are not offering enough credit have varying theories on the cause. It’s true that banks are tightening lending standards and being very cautious about how much money they expose to the risks of small businesses; however, some Credit Unions have claimed that they want to lend, but are stopped by regulatory limitations.

What you find out is that people can argue about these issues all day long; but, the waters are muddied by a general lack of data on mid-market and small businesses that leaves a giant gaping hole in our understanding. Without good data to figure out what’s really going on within these markets, it’s hard for the federal government to take effective action and hard for the financial industry to provide the right products and services. WAIN Street’s Business Credit Health Index (BCH Index) can provide the knowledge and insight needed to take effective action.

Wall Street is excellent at innovating financial products to meet the needs of a given group. If they had the right kind of data to understand the risk around mid-market and small businesses there’s a lot of good things they could accomplish. Through better understanding and management of portfolio risk, securitization, and new financial products Wall Street could help unlock easier, cheaper, and more accessible credit for the middle market and small businesses. If you have the data to understand what the challenges to credit are, you can create innovative solutions to address those challenges. Wall Street can serve mid-market and small businesses in a way they never have.

As we’ve talk about before in this blog, financial innovations like these are not without risk. In 2011 everyone has experienced how some useful innovations can change to financial WMD’s by mixing in some irresponsibility, regulatory complacency, and lack of understanding. But this is exactly why we need to have robust information. Usable data, like the data provided by the BCH index, will ensure that these innovations are well understood and not “black boxes”; a solid foundation of understanding will help Wall Street create the innovations the market needs and enable sensible regulations that allow them to be managed properly. Going back to the financial stone-age of basic checking and savings accounts isn’t going to help a middle market manufacturing firm get the unsecured line of credit they need to ramp up a new production line and hire new workers; but clearly allowing a financial wild west can’t be allowed either.

Getting the economy moving again is going to take a grown-up and measured approach to both innovation and regulation. Providing mid-market and small businesses, the engines of our economy, sufficient resources is an imperative. Federal Reserve Chair Ben Bernanke agrees as evidenced by the training sessions he’s been running to try and teach banks how to overcome issues around small business lending. With all the complexity around modern finance, understanding is at the center of success; and understanding requires good data.  The right data will allow Wall Street to serve mid-market and small businesses and help regulators keep things running smoothly. We can stop arguing over why these critical businesses are not borrowing, and start doing something about it.