Skip to comments.Why Arenít Banks Lending to Small Business? Ask Bernanke.
Posted on 05/03/2012 6:23:59 AM PDT by SeekAndFind
Banks profit by making loans, not refusing them. So why are banks making fewer loans to small business these days?
On March 29, at a lecture at George Washington University, Federal Reserve Chairman Ben Bernanke innocuously remarked that lately small businesses have found it difficult to get credit. Too bad that none of the students at the lecture thought to ask him why. A case can be made that the Fed is partially responsible.
Bankers, small business owners, and policymakers all agree that small business lending has declined substantially since before the financial crisis and Great Recession. Business loans under $1 million fell 13 percent between June 2007 and June 2011, and the amount lent has declined 19 percent when measured in inflation-adjusted terms, Federal Deposit Insurance Corporation (FDIC) statistics reveal.
But banks profit by making loans, not refusing them. So why are banks making fewer loans to small business these days? The decline is, in part, a response to the Federal Reserves incentives for banks to increase their lending standards.
When bank lending standards increase, fewer companies qualify for loans, cutting small business lending. Small businesses that would have received loans in 2006, when lending standards were less stringent, were unable to get them in 2011, when standards had been ratcheted up. As Kansas City banker Katherine Hunter explained in a recent Federal Reserve Bank of Kansas City publication, There are businesses that got loans five years ago that would not have today, under more traditional lending practices.
The banks increased their lending standards because the Fed told them to stop making the kinds of risky mortgage loans that led to the financial crisis. Unfortunately, small business lending was collateral damage in the effort to get rid of bad lending practices in the home mortgage business.
Efforts to fix bad mortgage practices hit small business lending because many small business owners use home equity to finance their operations. As I have explained in an earlier column, 28 percent of small businesses tapped equity in their homes to finance their businesses at the peak of the housing boom, according to Barlow Research, a Minneapolis-based market research firm. During the housing boom, households in which someone owned a small business were more likely than other households to take out home equity lines of credit and to borrow more money on those credit lines, Federal Reserve Bank research finds. With many small business owners making use of home loans to finance their companies, the Feds efforts to get banks to improve their home lending standards has meant less small business borrowing.
Moreover, when banks increase their lending standards, those increases often occur across the board. Therefore, in addition to raising standards for mortgage debt, the banks tightened them on small businesses borrowing in the aftermath of the financial crisis, the Federal Reserves Survey of Senior Loan Officers shows.
Of course, the current situation does not mean that the Fed should push the banks to loosen their small business lending standards. We do not want to return to an era of bad mortgage lending practices. And the banks made credit too easy for small business owners to get in the early 2000s. Both directly and through ballooning housing prices, their loose lending led too many marginal businesses to get started, encouraged small business owners to paper over their business problems by borrowing money instead of addressing the causes of cash flow difficulties, and resulted in over-borrowing by many companies.
The Fed might decide that the banks need to maintain todays higher lending standards, even if that means less small business lending than we used to have. But it should be more honest about whats going on. Instead of implying that small businesses have found it difficult to get credit because of some mysterious outside force, the Fed chairman should say that the Federal Reserve has encouraged banks to cut back on small business lending as part of an effort to get them to make better loans. Such straight talk would be consistent with the Feds new strategy of greater transparency about what it is doing.
-- Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.
One of the things I have seen personally is that some small businesses are actively shying away from borrowing. As one owner told me: “If I don’t owe the bank any money and I hit a hard patch, not having to make a monthly loan payment may just save me and my business.”
The Romney Administration can give an immediate boost to the economy by firing all the incompetents at the SBA and opening the floodgate to small biz loans especially manufacturing equipment.
To regain our manufacturing sector we need automated and high tech machinery not thirty-cent-per-hour workers.
The main point is that Obama is set on creating uncertainty!
This is what a ‘community organizer’ does, Create chaos and then you have power.
Why would anyone running a small business borrow money to make a bet when chaos reigns?
Taxes: going up in 2013!
Health insurance: going up in 2013!
Energy costs: going up in 2013!
Regulation compliance costs: going up in 2013!
You go borrow 100k and invest/spend it. Mega inflation hits and 100k will only buy you a coke. The bank only gets a coke for its original investment.
Handing WallStreet banks a trillion dollars to park at the fed in the form of “excess reserves” and collect interest on (which we pay for) can’t possibly be helping the situation.
[ One of the things I have seen personally is that some small businesses are actively shying away from borrowing. As one owner told me: If I dont owe the bank any money and I hit a hard patch, not having to make a monthly loan payment may just save me and my business. ]
I have seen a lot more people making money “on the side” cash only doing services for friends. Or even bartering services for services and goods for goods or vice versa. When you start making business so hard to do legally you end up promoting a black market.
The idiots in power never learn do they?
Small businesses will not take on debt when the fedgov is targeting them for destruction.