Weak Banks Drag on Small Business Lending

It seems obvious: Weaker banks are lending less to businesses than strong ones are, according to a new analysis from the Federal Reserve Bank of San Francisco. What’s surprising is how much of the recent drop in small business loans can be traced to a minority of community banks that are shrinking their loan books, even as healthy small banks increase lending.

Since the financial crisis struck four years ago, the amount of money banks lend to small businesses has been shrinking. That’s a problem because companies’ borrowing is considered crucial to creating jobs. The San Francisco Fed’s paper suggests that in 2011, the drop in lending by weak small banks overshadowed increases among stronger lenders.

These lenders made up about one-third of the 5,453 banks with less than $1 billion in assets that Laderman looked at. Community banks of this size provide about 41 percent of small business loans. (Her study didn’t look at larger banks.)

This drop comes despite years of government help for banks, from the original TARP bailout to the Small Business Lending Fund, designed specifically to boost small business lending by offering community banks low-cost capital from the U.S. Treasury. Laderman’s research didn’t address whether those efforts have succeeded. But, she says, “it suggests that even if those policies have been helpful, they’re not the whole solution.”

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