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Economic Focus: Bernanke Discusses Findings of 40 Small-Business Lending Meetings

Friday, October 1, 2010

The summer issue of Central Banker discussed a series of nationwide Fed meetings, including several in the Eighth District where community leaders explored small-business lending problems. In mid-July, Federal Reserve Chairman Ben Bernanke related preliminary findings from the 40 meetings that began in February.

Speaking at a July 12 conference in Washington, D.C., to address the financing needs of small businesses, Bernanke noted that credit conditions remain difficult for small businesses. According to Call Report data for 1Q 2010, loans to small businesses have decreased by more than $40 billion since 2Q 2008 ($710 billion down to $670 billion). Difficult to determine is how much the reduction has been driven by weaker demand for loans from small businesses, deterioration in the financial condition of small businesses during the economic downturn and/or restricted credit availability, he said.

Bernanke addressed an often-expressed concern that bank examiners have prevented banks from making good loans. "We take this issue very seriously. 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. Our message is clear: Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers," he said.

"Doing so is good for the borrower, good for the lender, and good for our economy. To ensure that this message is being heard and acted upon, we have conducted extensive training programs for our bank examiners as well as outreach with bankers, and we will continue to seek feedback from bankers and borrowers," he said.

Bernanke acknowledged that more can be done, and that the insights gained from meeting with small business owners, lenders, community leaders and others has given the Fed a "more nuanced understanding of the problem." Said Bernanke, "Not surprisingly, these meetings confirmed that facilitating small business financing is not a simple or straightforward matter. Notably, the term 'small business' encompasses a heterogeneous mix of enterprises, ranging from pizzerias to start-up technology firms, and each small business faces a unique combination of local economic conditions and complex relationships with customers, suppliers and creditors. Hence, we should be wary of one-size-fits-all solutions."

Among the common themes raised during the meetings were:

  • Declining value of real estate and other collateral securing their loans poses a particularly severe challenge.
  • Business owners cited credit lines and working capital as their most critical financial needs, followed by refinancing products that would permit them to take advantage of low interest rates.
  • Many owners resort to borrowing through their personal credit cards or from their retirement accounts. Several mentioned the need for small-value loans in amounts less than $200,000 as well as the need for "patient capital" from investors willing to commit funds for 5 to 10 years without an expectation of immediate returns.
  • Some lenders said that current lending conditions don't represent credit tightening as much as a return to more traditional underwriting standards following a period of too-lax standards.

Though some lenders said they were emphasizing cash flow and relying less on collateral values in evaluating creditworthiness, some creditworthy businesses—including some whose collateral has lost value but whose cash flows remain strong—have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating.

"The challenge ahead for lenders will be to determine how to assess the credit quality of businesses in an uncertain and difficult economic environment," Bernanke said. "It is in lenders' interest, after all, to lend to creditworthy borrowers; ultimately, that's how they earn their profits. Regulators, for their part, need to continue to work with lenders to help them do all that they prudently can to meet the needs of creditworthy small businesses."

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Bernanke's speech

Eighth District small-business lending meetings

Demographics of small-business lending