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Hillary Clinton's plan for small business contains a potentially huge idea

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Being for small business in American politics is like having a favorable attitude toward Mom or apple pie. But campaigning in Iowa this week, Hillary Clinton's thus-far policy-light campaign rolled out the germ of a small-business idea that has big implications: the federal government should help smaller businesses by showing more favorable treatment to small banks.

Unlike giant companies, small businesses can't raise money by issuing bonds and tapping public debt markets. They need to rely on loans for banks.

"For many small businesses," Clinton argued at a Tuesday event at a Des Moines bike shop, "these loans have always come from community banks with deep local ties. But today those same local banks are being squeezed by regulations that don't make sense for their size and mission."

Clinton didn't offer a specific policy remedy, though her rhetoric suggested a desire to let small banks get away with less-frequent and less-intense examinations.

Small banks are probably good for small business, maybe good for America

The specific claim that the health of the community banking sector is critical for small businesses is a piece of longstanding conventional wisdom within the small business community, a point of pride for community bankers, and backed up by a fair amount of expert analysis. It is not, however, a point of universal agreement.

In a 2013 paper for the Federal Reserve System, Allen Berger, Williams Goulding, and Tara Rice concluded that the link between small business and small banks is largely obsolete, "perhaps because of changes in lending technologies and deregulation of the banking industry."

Naturally, Terry Jorde of the Independent Community Bankers of America disagrees with this conclusion noting that "while community banks comprise just 20% of the banking industry's assets, institutions with less than $10 billion in assets provide nearly 60% of the industry's small-business loans." In other words, a community bank is much more likely to channel deposits into small-business lending than into derivatives trading, making strong small banks an attractive source of money for small businesses. Dan Tarullo of the Federal Reserve Board of Governors seems to agree, citing several pieces of research on the importance of small banks' relationship-centric approach to lending versus larger banks' algorithmically driven behavior.

Of course, a separate question is whether a financial model that disproportionately benefits smaller companies is good for the country overall.

Will small banks help Wall Street or crush it?

Ultimately, however, small banks may be less important for their role in small-business lending than for their role as political pawns. After all, while doing regulatory favors for Wall Street isn't very politically palatable, helping out small banks sounds great — and if laxer regulation also happens to help the JP Morgans and Goldman Sachses of the world, well, that's great for fundraising.

Clinton specifically called out this behavior, arguing that Republicans "insist on using this issue to give relief to community banks as a Trojan horse for rolling back the protections for consumers and rolling back the rules for the big banks." This is, obviously, not how Republicans would characterize their actions. But they are, broadly speaking, seeking to roll back Obama-era bank regulation, which some experts argue disproportionately burdens small banks.

Conversely, whatever the specific merits of the small banking sector, it can be a potent political ally for progressives looking to bring Wall Street to heel.

As Ryan Lizza detailed in a recent New Yorker profile of Elizabeth Warren, the key to her legislative successes against Wall Street megabanks has been an alliance with the small banks' lobby. By stipulating that the Consumer Financial Protection Bureau will exempt smaller banks from some of its strictures, for example, Warren was able to turn the creation of a strong CFPB into a competitive advantage for community banks. That gave Warren the legislative juice she needed to get it passed into law.

This kind of hard-nosed politicking isn't the kind of thing elected officials like to talk about, but there was a lot of it in the real history of bank regulation in the 1930s. Many progressives are deeply skeptical of Clinton's bona fides as an enemy of Wall Street, and a speech at an Iowa bike shop isn't going to change that. But the basic principle Clinton outlined — tougher rules on Wall Street combined with generous exemptions for smaller banks — is the most politically plausible vision for bringing megabanks to heel.

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