Walter W. Eubanks
Specialist in Financial Economics
The new Basel Capital Adequacy Accord (Basel III) is of concern to Congress mainly because it could put U.S. financial institutions at a competitive disadvantage in world financial markets. The Basel capital accord is an agreement among countries’ central banks and bank supervisory authorities on the amount of capital banks must hold as a cushion against losses and insolvency. Higher capital requirements constrain bank lending and profitability. The accords are not treaties. Member countries may modify the agreement to suite their financial regulatory structures. The concern is that Basel III might be in conflict with the new capital requirements U.S. regulators are implementing under the Dodd-Frank Act (P.L. 111-203). Basel III was the central focus of the discussion at the September 22, 2010, House Committee on Financial Services hearing on international regulatory issues relevant to the implementation of the Dodd-Frank Act. A day after member central bank governors approved the quantitative capital requirements of Basel III, Senate Banking Committee Chairman Christopher Dodd issued a statement warning of the potential for international regulatory arbitrage in implementing Basel III.
The first Basel accord was adopted in 1988 and is credited with providing stability to the international banking system. Banking regulators in the United States and other countries developed Basel II in 2004 because Basel I was not sufficiently sensitive in measuring risk exposures. By 2006, the European Union implemented Basel II. U.S. banking regulators issued the final rules for the implementation of the Basel II on December 7, 2007, and published the final regulations for implementing Basel II on April 1, 2008. At the time, the United States was in the most severe economic recession in more than 70 years. Federal regulatory agencies turned their attention to stabilizing the financial system, and Basel II was never fully implemented.
Basel III would make significant changes in bank regulatory capital requirements. It would increase the amount of common tangible equity held as minimum regulatory capital because common equity improves loss absorbency. Tangible common equity consists of bank shares and retained earnings. This increase is a significant change in regulatory capital requirements because many assets that are being used as regulatory capital would have to be converted to common tangible equity. By 2015, more than half of the total regulatory capital would be composed of common tangible equity capital. Common tangible equity will also be used in a new conservation capital buffer. This capital conservation buffer is to ensure that banks build up capital outside periods of financial stress that can be drawn down when losses are incurred. The minimum total capital plus conservation buffer would be 10.5% of risk-weighted asset in January 1, 2019, which is 2.5% higher than the current minimum requirement. If another element, the countercyclical capital buffer, is fully added, the minimum total capital requirement would be 13% of riskweighted assets. This would be a remarkable increase in capital requirement from current levels. Very few U.S. banks were able to maintain 13% of risk-weighted assets at the highest level of U.S. bank profitability. At that time, the average total equity capital ratio was 10.52%.
This report follows the basic elements of the Basel III documents on the types of capital requirements and their phase-in schedule, which were approved by the Basel member central bank governors on September 12, 2010. The elements are the new definition of Tier 1 capital, the minimum common equity capital, the capital conservation buffer, countercyclical capital buffer, liquidity coverage ratio, global leverage ratio, and wind-down government capital injections. The report concludes with some implications drawn from its content.
Date of Report: October 28, 2010
Number of Pages: 16
Order Number: R41467
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Robert Jay Dilger
Senior Specialist in American National Government
The Small Business Administration (SBA) administers several programs to support small businesses, including the Historically Underutilized Business Zone Empowerment Contracting (HUBZone) program. The HUBZone program is a small business federal contracting assistance program “whose primary objective is job creation and increasing capital investment in distressed communities.” It provides participating small businesses located in areas with low income, high poverty rates, or high unemployment rates with contracting opportunities in the form of “setasides,” sole-source awards, and price-evaluation preferences.
In FY2009, the federal government awarded contracts valued at $13.1 billion to HUBZone certified businesses, with $3.4 billion of that amount awarded through the HUBZone program. The program’s total administrative cost is an estimated $11.7 million. In FY2010, it received an appropriation of $2.2 million, with the additional cost of administering the program provided by the SBA’s appropriation for general administrative expenses.
Congressional interest in the HUBZone program has increased in recent years, primarily due to U.S. Government Accountability Office (GAO) reports of fraud in the program. Some Members have called for the program’s termination. Others have recommended that the SBA continue its efforts to improve its administration of the program, especially its efforts to prevent fraud.
This report examines the arguments presented both for and against targeting assistance to geographic areas with specified characteristics, such as low income, high poverty, or high unemployment, as opposed to providing assistance to people or businesses with specified characteristics. It then assesses the arguments presented both for and against the creation and continuation of the HUBZone program, starting with the arguments presented during consideration of P.L. 105-135, the HUBZone Act of 1997 (Title VI of the Small Business Reauthorization Act of 1997), which authorized the program.
The report also discusses the HUBZone program’s structure and operation, focusing on the definitions of HUBZone areas and HUBZone small businesses and the program’s performance relative to federal contracting goals. The report includes an analysis of (1) the SBA’s administration of the program, (2) the SBA’s performance measures, and (3) the potential effect of the 2010 decennial census on which areas qualify as a HUBZone.
Congressional actions on several bills during the 111th Congress are also examined, including S. 3020, the HUBZone Improvement Act of 2010, which would extend for three years HUBZone eligibility for firms that lose their HUBZone eligibility due to the release of 2010 decennial census economic data and require the SBA to implement several GAO recommendations designed to improve the SBA’s administration of the program; and H.R. 5297, the Small Business Jobs Act of 2010, which was signed into law (P.L. 111-240) by President Obama on September 27, 2010. It amends the Small Business Act to remove certain language that had prompted federal courts and GAO to find that HUBZone set-asides have “precedence” over other small business set-asides.
Date of Report: October 22, 2010
Number of Pages: 30
Order Number: R41268
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Robert Jay Dilger
Senior Specialist in American National Government
The Small Business Administration (SBA) administers programs to support small businesses, including several loan guaranty programs designed to encourage lenders to provide loans to small businesses “that might not otherwise obtain financing on reasonable terms and conditions.” The SBA’s 504 Certified Development Company (504/CDC) loan guaranty program is administered through non-profit Certified Development Companies (CDC). It provides long-term fixed rate financing for major fixed assets, such as land, buildings, equipment, and machinery. Of the total project costs, a third-party lender must provide at least 50% of the financing, the CDC provides up to 40% of the financing through a 100% SBA-guaranteed debenture, and the applicant provides at least 10% of the financing. It is named from Section 504 of the Small Business Investment Act of 1958 (P.L. 85-699, as amended), which authorized the program. In FY2010, the SBA approved 7,833 504/CDC loans amounting to about $4.4 billion.
Congressional interest in the 504/CDC program has increased in recent years because of increased concern that small businesses might be prevented from accessing sufficient capital to assist in the economic recovery. Congress authorized several changes to the 504/CDC program during the 111th Congress in an effort to increase the number, and amount, of 504/CDC loans. For example, P.L. 111-240, the Small Business Jobs Act of 2010, increased the 504/CDC program’s loan guaranty limits from $1.5 million to $5 million for “regular” borrowers, from $2 million to $5 million if the loan proceeds are directed toward one or more specified public policy goals, and from $4 million to $5.5 million for manufacturers. It also temporarily expands the ability of 504/CDC borrowers to use the program for the refinancing of existing debt, creates an alternative 504/CDC size standard to increase the number of businesses eligible for assistance, and provides $510 million to extend through December 31, 2010, the temporary subsidization of 504/CDC and 7(a) loan guaranty program fees and the temporary increase in the 7(a) program’s maximum loan guaranty percentage from up to 85% of loans of $150,000 or less and up to 75% of loans exceeding $150,000 to 90% for all standard 7(a) loans. The fee subsidies and 90% loan guaranty percentage were initially funded under P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), and had expired on May 31, 2010.
This report opens with a discussion of the rationale provided for the 504/CDC program, the program’s borrower and lender eligibility standards, program requirements, and program statistics, including loan volume, loss rates, use of the proceeds, borrower satisfaction, and borrower demographics.
It then examines congressional action taken during the 111th Congress to help small businesses gain greater access to capital, including the enactment of ARRA and P.L. 111-240, the Small Business Jobs Act of 2010. It also examines issues raised concerning the SBA’s administration of the program, including the oversight of 504/CDC lenders.
Date of Report: October 21, 2010
Number of Pages: 29
Order Number: R41184
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Robert Jay Dilger
Senior Specialist in American National Government
Oscar R. Gonzales
Analyst in Economic Development Policy
Gary Guenther
Analyst in Public Finance
Congressional interest in assisting small business has increased in recent years primarily due to continuing concerns about unemployment and the sustainability and robustness of the current economic recovery. In the past, small business has typically led job formation during economic recoveries. However, there has been increased concern in Congress that small businesses might be prevented from accessing sufficient capital to enable them to take on that job creation role during the current recovery. Financial institutions have tightened their lending standards and, in 2008 and early 2009, there were major disruptions of business credit markets that made it difficult, and in some instances impossible, for financial institutions to sell their loans on the secondary market.
Since 2009, business credit markets have improved and most financial institutions report that they are no longer tightening their small business lending standards. However, the Federal Reserve Board notes that those lending standards “remain quite stringent.”
Congressional efforts to assist small business have focused on tax relief, enhancing small business access to capital, and amending the Small Business Act to authorize changes to the Small Business Administration (SBA). The SBA administers several programs to support small businesses, including loan guaranty programs to enhance small business access to capital; programs to increase small business opportunities in federal contracting; direct loans for businesses, homeowners, and renters to assist their recovery from natural disasters; and access to entrepreneurial education to assist with business formation and expansion.
This report examines three legislative measures considered during the 111th Congress that were designed to assist small business: (1) H.R. 3854, the Small Business Financing and Investment Act of 2009, which would have authorized several new SBA programs and modified others; (2) the House-passed version of H.R. 5297, the Small Business Jobs and Credit Act of 2010 (initially titled the Small Business Lending Fund Act of 2010), which would have authorized four new small business lending programs, provided about $3.8 billion in tax relief for small businesses over 10 years, and included several revenue raising provisions to offset the bill’s cost; and (3) the Senate-passed version of H.R. 5297, which became P.L. 111-240, the Small Business Jobs Act of 2010. The act authorizes the Secretary of the Treasury to establish a $30 billion Small Business Lending Fund to encourage community banks to provide small business loans, a $1.5 billion State Small Business Credit Initiative to provide funding to participating states with small business capital access programs, and about $12 billion in tax relief for small businesses. It also includes revenue raising provisions to offset the act’s cost and authorizes changes to the SBA’s loan guaranty, export promotion and contracting programs.
This report includes a discussion of the major provisions in each of these legislative measures, noting the key differences among them. A side-by-side comparison of the major provisions in H.R. 3854, the House-passed version of H.R. 5297, and the Senate-passed version of H.R. 5297, which became P.L. 111-240, are also presented in a table in the Appendix.
Date of Report: October 12, 2010
Number of Pages: 52
Order Number: R41385
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Molly F. Sherlock
Analyst in Economics
Erika K. Lunder
Legislative Attorney
Edward C. Liu
Legislative Attorney
The explosion of the Deepwater Horizon oil rig and subsequent oil spill into the Gulf of Mexico has led to substantial damages, particularly in the form of lost wages and income. BP has begun to make interim payments to compensate for lost income resulting from the oil spill. Individuals and businesses impacted by the oil spill may file a claim with the Gulf Coast Claims Facility, an independent entity established to administer the claims, with payments coming from an escrow account funded by BP. The tax consequences of these payments to the recipients will depend on the nature of the underlying claim. Payments received for lost wages or income will generally be taxable, while payments for other types of claims, such as physical injury or damage of property, may qualify for exclusion or deferral.
Given the magnitude of the economic disruption resulting from the spill, however, policymakers may consider exploring alternative mechanisms for providing relief to the affected region. In the past, Congress has used the tax code as a tool to provide relief to disaster victims. While the Gulf of Mexico oil spill has not been classified as a federally declared disaster, the tax code could be used as a mechanism for delivering additional relief. Tax policy options that could be explored include added casualty loss deductions, an extended net operating loss (NOL) period, employment incentives, enhanced access to retirement savings, and incentives for charitable relief.
Similar policies were adopted following past disasters. However, the oil spill in the Gulf of Mexico presents lawmakers with unique challenges in using the tax code to provide relief. First, the oil spill is not a natural disaster. The oil spill is the result of human action where, unlike a natural disaster, compensation may be recovered from a financially responsible party. Second, the nature of the damages is different from those typically borne by victims of natural disasters. Specifically, damages may primarily be in the form of lost business income and employment, rather than direct property loss. Relief that has been awarded in the past, such as tax filing extensions to assist with the destruction of taxpayer records, is not likely to be an issue. Finally, if the goal is to provide relief or assistance to the poor, the tax code may not be the best policy instrument.
Legislation has been introduced in the House and Senate that would provide tax relief to the Gulf Coast oil spill victims. The Oil Spill Tax Relief Act of 2010 (H.R. 5598) would require that any compensation provided by BP to an oil spill victim be treated as a qualified disaster payment, and thereby excluded from gross income for tax purposes. The Gulf Coast Access to Savings Act of 2010 (H.R. 5602) would allow for enhanced access to retirement savings. The Gulf Oil Spill Recovery Act of 2010 (H.R. 5699) would make various tax relief measures available to businesses and individuals. Similar to H.R. 5699, the Gulf Coast Oil Recovery Zone Tax Relief and Economic Recovery Act (S. 3934) would provide various forms of tax relief for businesses and individuals in the affected region.
Date of Report: October 14, 2010
Number of Pages: 17
Order Number: R41323
Price: $29.95
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