By Eliot Stark - Debate continues over a potential $30 billion government-backed infusion of capital to small businesses. As I’ve noted in the media, the concern is whether this “no risk” funding will fuel loans to businesses that aren’t creditworthy enough to meet banks’ normal underwriting standards. And, if approved, who will be the banks willing to make riskier loans?

A very real issue is that it could be tempting for banks that don’t have sufficient size, resources and capital strength to win quality lending business without a governmental handout. And the government backing may tempt banks to make loans to companies that represent relatively high credit risks. If this funding resulted in higher default rates, taxpayers are going to be the losers.

And it won’t solve a fundamental problem – there are simply too many banks, and far too many weak, undercapitalized banks. Many institutions are now hanging on for dear life. Others are doing well but remain too small to attract the capital needed to grow and make quality loans as the economy strengthens.

My concern is the institutions most likely to take this government funding are the ones at greatest risk. If so, a capital infusion from Uncle Sam will only prolong the inevitable for these banks. Many bankers remain in a state of denial about their long-term prospects, thinking they can successfully stand alone without sufficient size or strength.

At Capital Insight, we strongly believe in the community banking model. But every sign points to the fact that troubled or capital-starved banks need to seek a partner for merger or acquisition. They may have numerous attractive aspects, such as a quality customer base or a good base of deposits, but they don’t have the size to withstand higher capital requirements and still have sufficient resources to profitable manage their businesses.

And community banks with less than $1 billion in assets that have emerged from the past two years in good shape need to seriously consider scaling up to remain competitive and have a sufficiently diversified lending portfolio to capitalize on quality lending opportunities.

But if the $30 billion capital infusion gets people talking and thinking about the real issues – the ability of healthy, well-capitalized community banks to make loans to strong credits – then it’s a productive conversation.