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Blog Archive–NACM Blog Credit Real Time: The Latest in Commercial Credit

Fed's Duke Reiterates Need for Bank Lending

The Federal Reserve continues to browbeat, coerce and even appear to beg bankers to resume offering credit and unfreezing credit lines for businesses and consumers alike.

Fed Governor Elizabeth Duke, in a speech to a group of bankers gathered at a June 30 Ohio Department of Commerce event, reemphasized the need for financial institutions to start lending more frequently than in past, recession-fraught years. She did, however, stress that such credit should be extended to "worthy borrowers" in a manner that is more prudent than the easy-money economic boom years around the middle of last decade.

"In no way do we want to return to the world where people could buy a house with no money down and no documentation," said Duke. "But where prudent loans can be made, we want to do everything we can to make sure those deals are struck. It's best for the banks, it's best for the borrower and it's best for our economy as a whole."

Duke, who promised the Fed would continue to support opening up credit availability post-recession, also focused the following passage specifically on the situation of small businesses:

"Data that would indicate underlying borrower demand is much harder to find for small businesses than it is for consumers. Nonetheless, a number of indicators suggest that demand for credit by small businesses is down. Over the past two years, the National Federation of Independent Business (NFIB) monthly economic trends survey has consistently found that the problem reported as being most important by the largest number of small businesses was poor sales. The NFIB survey also shows that, despite a slight improvement in the last couple of months, the percentages of firms planning capital expenditures, increasing inventories, or finding it a good time to expand facilities are still very low by historical standards. These findings suggest that some potential borrowers are likely on the sidelines waiting for a good reason to expand or build inventories.

Despite these indicators of reduced demand, we continue to hear about difficulties experienced by small businesses in obtaining credit. The number of complaints we hear is supported by data from the NFIB's May survey indicating that the percentage of small businesses reporting tighter credit conditions than three months earlier was at levels comparable with its peaks of the early 1990s. Moreover, as reported in the NFIB's 2009 Credit Access Poll, among small businesses that attempted to borrow in 2009, only 50% got all or most of the credit they wanted. An earlier NFIB poll found that, during the period from 2003 to 2006, 61% of firms attempting to borrow got all of the credit they wanted and another 28% got most of the credit they wanted. This suggests that credit conditions for small businesses today remain tight, especially compared with the 2003-2006 period.

Of course, some of the difficulty that small businesses are currently experiencing in obtaining credit reflects their weakened economic condition. Although the May NFIB survey shows an improvement in actual sales, they remain below pre-recession levels. Furthermore, commercial real estate values have declined almost 40% during the downturn, and many small businesses rely on real estate as a source of capital or as collateral for other loans. The NFIB reports that as of the end of 2009, 95% of small business owners owned personal, commercial, or investment real estate; 21% used proceeds from mortgages to finance business activities; and 11% used real estate as collateral for loans. It is likely that most small business owners have seen a decline in the value of real estate owned, and many may have at least one property on which they owe more than the property's value.

To better understand what is happening in the area of lending to small businesses, the Federal Reserve System is holding more than 40 meetings across the country to gather information that will help the Fed and others craft responses to the immediate as well as longer-term needs of small businesses. In May, for example, the Federal Reserve Bank of Cleveland hosted five small business roundtable discussions in the region--one each in Columbus, Toledo, Cleveland, Cincinnati, and Pittsburgh--and a workshop on venture capital as part of this series of meetings. These meetings have brought together people with a wide range of backgrounds, including those from banks, community development financial institutions, bank exam teams, federal and local government, and small business trade groups..."

Click here for the Duke's full speech.

Brian Shappell, NACM staff writer

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