Small Business Lending Still Grim, But Fed Official Hopeful

Fed Governor Elizabeth Duke (By Dennis Cook-Associated Press)Bank loans to small businesses continue to deteriorate, and some lenders don’t anticipate much improvement for the rest of the year, according to prepared testimony by Federal Reserve Governor Elizabeth Duke.
But Duke said she is “somewhat optimistic” that the tightening of credit is close to an end, and lending to small businesses will see increases later in the year — based on “some momentum” in spending by businesses and households, and the overall upswing in the equity markets.
“…Bank attitudes toward lending, including small business lending, may be shifting,” Duke said in testimony made public today by the Fed on its website. Duke is to give the assessment on small business lending tomorrow before the House Committee on Financial Services and Committee on Small Business. 
Duke said that “bank tightening of credit standards for small business and commercial and industrial lending appeared to be nearing an end, with similar numbers of banks reporting tightening and easing of their lending standards.”
However, Duke’s prepared testimony also relayed a bleak outlook on the current state of small business lending derived from the banking sector itself.
“Anecdotal information suggests that, while consumer delinquencies may be close to peaking, other types of lending such as commercial real estate and small business lending are likely to see delinquencies and charge-offs continue to rise for some time to come,” Duke said.
Fed officials for months have been warning of the intensifying crisis in the quality of two categories of lending by small and large financial institutions: commercial real estate, and commercial and industrial loans. The faltering portfolios are hitting smaller banks harder, those with $10 billion or less in assets. And they tend to cater more to small businesses.
Moreover, the smaller banks have been increasingly conservative in their lending standards and “some potentially profitable loans to creditworthy small businesses may have been lost because of these concerns,” Duke said.
 The Obama Administration is proposing re-directing $30 billion in bailout funds into community banks to bolster small business lending. He is also proposing a larger budget for the Small Business Administration’s loan guarantees and billions in tax incentives tied to job creation.
“A large net fraction of banks reported that the credit quality of their existing commercial and industrial loans to small firms was worse than that for their loans to larger firms in the fourth quarter,” Duke said. “In addition, respondents did not, on net, anticipate an improvement in the performance of their small loan portfolio over the next year.”
Duke said some banks may be overly conservative in their small business lending “because of concerns that they will be subject to criticism from their examiners.”
But she stressed that the Federal Reserve has worked with other bank and thrift supervisors “to ensure that supervisory policy does not unnecessarily constrain credit to creditworthy borrowers.”

One thought on “Small Business Lending Still Grim, But Fed Official Hopeful

  • July 21, 2010 at 1:19 am
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    good post. May I copy this article in my blog? surely I’ll write down the source .. 🙂 Thanks.

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