Alert October 02, 2012

OCC Issues Guidance on How Banks May Use SBICs to Expand Their Small-Business Finance Activities

The OCC issued an edition of its Community Developments Insight report entitled “Small Business Investment Companies: An Investment Option for Banks” (the “Guidance”).  The Guidance discusses how banks may use small business investment companies (“SBICs”) to expand their small-business finance activities.

The OCC points out in the Guidance that banks are interested in making investments in SBICs because such investments can allow banks to accomplish three objectives:  (1) earn a competitive investment return; (2) in the case of a “large” or “intermediate small” bank for Community Reinvestment Act (“CRA”) purposes, receive CRA credit for the investment under the “investment test” or the “community development test”; and (3) attract new and retain existing small business customers.  The Guidance explains that SBICs that use leverage have the potential to generate attractive investment returns because “SBICs can supplement their own private capital with [Small Business Administration] leverage in amounts of up to three times their private capital,” allowing SBICs to provide funding at lower costs than competitors relying entirely on private capital.

The Guidance also provides a discussion of how SBICs operate, the SBIC licensing process, oversight of SBICs and management of an SBIC’s operational risk.  The Guidance stresses that the bank regulatory agencies expect that a bank that invests in an SBIC has the management expertise and depth to monitor the investment effectively.