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 Reserve’s incentives for banks to increase their lending standards.
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 Fed’s efforts to get banks to improve their home lending standards has meant less small business borrowing.
Read more: http://www.american.com/archive/2012/may/why-arent-banks-lending-to-small-business-ask-bernanke
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 Reserve’s incentives for banks to increase their lending standards.
When bank lending standards increase, fewer companies qualify for loans, cutting small business lending.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 Fed’s efforts to get banks to improve their home lending standards has meant less small business borrowing.
Read more: http://www.american.com/archive/2012/may/why-arent-banks-lending-to-small-business-ask-bernanke
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