The history of banking goes back to 2000 BC in Assyria, India, and Sumeria, where merchants gave loans to grain farmers and traders. Ancient Greece and Rome pushed banking further, with lenders in temples providing loans, accepting deposits, and changing money. The Renaissance in Italy modernized banking, with certain institutions founded during this era still in operations today. Banca Monte dei Paschi di Siena is the oldest such one, having been started in 1472. Flash forward to today and banks are critical for U.S. economic activity, holding some $22 trillion in total assets.
While banking has been a critical driver of growth and development historically, its track record is by no means spotless. World history is littered with boom-and-bust economic cycles caused by the irresponsible provision of credit – a consistent reminder of the dangers potentially lurking within banks. With each crash, an angry populace has looked for outlets to vent, leading to pop culture creations such as Wall Street’s Gordan Gekko or Rolling Stone’s “vampire squid.” And of course, politicians have found in these crises ample opportunities to chase votes, boasting about down-sizing, taxing, and/or regulating banks into submission.
To paraphrase Mr. Gekko, is banker greed really good? And what does this have to do with cannabis?
The U.S. cannabis industry is pursuing a novel experiment – launching itself from scratch without access to banking credit. This is because, while certain states have legalized cannabis, banks are federally regulated and must comply with such law. This means, without Federal law changes, banks are effectively barred from cannabis lending.
The impact has been severe – much like running an engine without oil. Cannabis is an industrial business, with its backbone in agriculture. This requires significant upfront capital not only for facilities and equipment but also for working capital usages like inventory and retailer receivables. Add growth, high seasonality, and the stretching of supply chains due to the pandemic, and there’s big capital needs just to operate daily.
In normal industries, banks would step into these situations. Facilities and equipment are solid assets for medium-term bank loans, while working capital loans are typically short-term and low risk. Yet, in cannabis, companies are shutout from these low-cost financing options and forced into dilutive equity or high-cost private loans. Making life more difficult, most cannabis companies are small and competing for scarce private equity, while the largest ones are listing publicly on non-standard exchanges (so called “over the counter”), where liquidity, regulation, and transparency are lower and investor risk higher.
Close industry followers will point to the changing regulatory tide for cannabis, which is generally favorable for the industry. True! (Well, sort of) Our public servants are on it, creating a bill called the “Secure and Fair Enforcement (SAFE) Banking Act”, which would prohibit regulators from penalizing banks doing business with cannabis companies. The bill was first introduced in 2017 but never received a vote. It was subsequently reintroduced in 2019, where it passed the House but failed in the Senate. Finally, the bill is back in 2021, passing the House again and awaiting a Senate review.
While the Senate composition is different now than in 2019, there’s still concern among industry on-lookers. There are political points to be scored on the cannabis issue, so certain members of Congress are focused on broader legalization, specifically the MORE Act. While we applaud this legislation as well, it’s more complex – including a variety of legal, economic, and social equity concerns – so we fear it will take longer to become law while sidelining the much-needed banking reform.
At Presidio View Capital, we try to balance the idealistic with the practical. We see real damage being done to fledgling companies with no access to credit and a near-term and achievable fix with the SAFE Act. While there are many noteworthy goals of cannabis reform, we believe one of most critical one is building a successful and stable industry to replace the scourge of the black market. Plus, when you have it worse than Sumerian farmers in 2000 BC, we think that’s a legit concern.
Thanks for tuning in, and until our next update, please stay safe and healthy.
Mike, Kip, and Austin
Co-Managers, Presidio View Capital