Big Banks Loan Less to Small Businesses

According to a May 2010 Congressional Oversight Panel report, in spite of the big banks having increased their share of small business lending over the last decade by 4.1%, between 2008 and 2009 their small business loan portfolios fell by 9.0%.

So many borrowers began to look to local banks to pick up the slack, but smaller banks are constrained by their exposure in their existing loan portfolio, closer oversight by bank regulators, and their uncertainty regarding the economy. Therefore, many small businesses have struggled to find adequate financing.

The federal government launched several TARP initiatives aimed at restoring health to the financial institutions. While officials have stated that they believe that providing cheap capital to the banks will lead to increase lending, the Panel is skeptical that government officials have the grounds on which to make such an assumption. After all, the largest Tarp recipients did not lend more: quite the contrary they reduced their portfolios.

The Panel recommends that the federal government:

  • Establish a rigorous data collection system or survey that examines small business finance in the aftermath of the credit crunch and going forward.
  • Require, as part of any future capital infusion program, reporting obligations that would make it easier to evaluate whether the support provided by the program actually has the capacity to achieve the hoped-for results.
  • As part of its consideration of small business lending, evaluate whether a capital infusion program is likely to have the effect of increasing lending, and is therefore worth pursuing.
  • Consider specifying minimum standards for underwriting loans in order to be sure that the incentives embedded in any program do not spur imprudent lending; and
  • If the incentive programs are to be pursued, evaluate whether they can be implemented quickly effectively.

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Source: Big Banks Loan Less to Small Businesses

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