Banking

Improving credit flow to small businesses is crucial to economic recovery and to restoring communities damaged by foreclosures and job losses, Federal Reserve Chairman Ben Bernanke and Fed Gov. Elizabeth Duke said in recent speeches. Both spoke in Washington, DC, at a meeting named "Addressing the Financing Needs of Small Businesses," part of a series of meetings sponsored by the Federal Reserve.

Conditions tight from coast to coast
Bernanke and Duke said small businesses across the nation report that credit conditions remain difficult for myriad reasons. Those reasons involve issues both on the part of banks and on the part of small companies.

Solving those problems belongs at the top of the Fed's current policy challenges, Bernanke and Duke said. "I wish I could conclude this wrap-up with a list of the three or four things we could do to immediately unlock small business lending," Duke noted at the end of her July 12 remarks. "But the problems are numerous and complex and they will require creativity and persistence to solve."

Citing a host of difficulties
Bernanke and Duke pointed out a number of challenges:

• Small businesses are highly diverse and face their own particular combinations of local economic conditions and relationships with customers, suppliers, and creditors. Thus, one-size-fits-all solutions typically won't work.
• The declining value of real estate and other collateral securing small business loans poses a severe challenge.
• The lending power of some banks is constrained by weaknesses in their balance sheet, such as low capital or liquidity. Others might have the balance sheet capacity to lend but are restricted in some categories because of problems or concentrations in their loan portfolios.
• During the Fed meetings, small business owners voiced concern over a lack of products suited to their credit needs, particularly small-dollar loans.
• Finally, small businesses and banks both say a major cause of the tightened credit environment is regulatory uncertainty and, in particular, concern about the classification of assets by bank examiners.

Acknowledging small business's big role
Regulatory agencies, including the Fed, have taken steps to help smooth the flow of credit to small companies, which Bernanke noted employ about half of all Americans and account for roughly 60 percent of gross job creation.

"The Federal Reserve has worked assiduously with the other banking regulators to develop interagency policy statements on this issue, aimed at both banks and examiners," Bernanke said. "Our message is clear: Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers."

He pointed out that the Federal Reserve helped bring capital from the securities markets to small businesses through the Term Asset-Backed Securities Loan Facility, the TALF program. More than 850,000 small business loans were financed in part by securities whose issuance was supported by TALF, he noted.

July 29, 2010