Bernanke Concerned About Credit Availability for Small Businesses

JULY 16, 2010

FINANCIAL FEATURE

By Josh Silverman, Director, Term Funding & Risk Management

Even though the Federal Reserve continues to hold short-term interest rates at a range of zero to 0.25 percent and the economy is growing, the overall availability of credit continues to be tight—especially for small businesses and consumers. Fed Chairman Ben Bernanke is particularly concerned about the lack of available credit for small businesses, which account for about 60 percent of job creation.

In a speech at the Fed’s forum on restoring credit to small businesses, Bernanke said the scarcity of credit is slowing the economic recovery and keeping the unemployment rate close to 10 percent. During a typical recovery, small businesses create jobs at a faster pace than large firms. That has not recently been the case, in part because many small businesses cannot get loans.

In his prepared remarks, Bernanke said “making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges.” Bernanke also noted that “the formation and growth of small businesses depends critically on access to credit.” According to a recent bank survey by the Fed, however, lending standards among local banks—the lending institutions that small businesses rely upon—remained restrictive during the first quarter. Interestingly, the survey also revealed that major banks eased loan conditions to large firms during the first quarter, indicating that credit for big, investment-grade companies is becoming more available.

Banks say they are restricting credit because of an uncertain regulatory climate pending the passage of the U.S. financial reform bill and the likelihood of new capital requirements from international regulators. Additionally, some lenders have said current lending standards reflect more normal conditions following a period of lax standards. Demand for credit also has been depressed, with a still-fragile economy making many small businesses reluctant to hire and invest. It is a challenging cycle, as credit availability needs to improve in order to stimulate the recovery; but weak economic fundamentals are making cautious lenders less willing to supply credit.