PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

A Snapshot on Small Business Loans and What’s Needed for Reinvigoration

By at 8 November, 2017, 5:47 pm

by Raymond J. Keating-

The Federal Reserve released its latest Senior Loan Officer Opinion Survey on November 6, and it pointed to some weakening of business loan demand coupled with easing of standards and terms by banks.

Specifically, this quarterly survey of domestic banks and U.S. branches of foreign banks reported regarding commercial and industrial (C&I) loans, that on balance, “modest net percentages of banks reported that they eased standards … over the past three months. Further, terms on such loans became less restrictive, on balance, with all loan terms either having been eased or having remained basically unchanged.” That included easing some terms for small businesses.

In terms of demand for C&I loans, “a moderate net share of domestic banks reported that demand from large and middle-market firms weakened, while demand for such loans from small firms was reportedly unchanged on net.”

As for commercial real estate lending, it was reported, “A significant net fraction of banks reported tightening their standards for loans secured by multifamily residential properties, while banks reportedly left standards for loans secured by nonfarm nonresidential properties and those for construction and land development purposes basically unchanged on net. Banks also reported that demand for CRE loans weakened during the third quarter. A moderate net fraction of banks reported weaker demand for loans secured by multifamily residential properties, while modest net fractions of banks reported weaker demand for construction and land development loans and for loans secured by nonfarm nonresidential properties.”

This weakening in CRE loans lines up with a decline in nonresidential structures investment in the third quarter GDP numbers.

This latest survey information also should be put in context with the longer term trend in small business lending, as examined in a recent SBE Council analysis. As noted in that report, “both small business loan balances and the number of small business loans continue to grow. However, small business lending still has not recovered to levels before the 2008-09 credit/economic meltdown.”

Two policy areas converge when it comes to getting small business lending reinvigorated. The first is reining excess regulatory costs that inhibit banks from making certain loans, and restrain the creation and growth of smaller community banks that play such an important part in small business lending. (See the most recent instance of Congress and President Trump rolling back an unwarranted and costly regulation invoked by the Consumer Financial Regulatory Bureau (CFPB), and a broad look at the need to rein in Dodd-Frank’s regulatory monster.)  SBE Council, for example, supports H.R. 3312, the Systemic Risk Designation Improvement Act of 2017, which proposes alternative and more appropriate measures to determine a bank’s risk to the financial system. These institutions include mid-size and regional banks, where stringent Dodd-Frank regulations have hampered their ability to lend to small businesses.  (See SBE Council’s support letter for H.R. 3312 here.)

The second is the need to pass substantive, permanent, pro-growth tax reform/relief, as well as measures for providing broad regulatory relief and reform. Such measures would incentivize entrepreneurship and small business growth, and of course, thereby increasing small business loan demand.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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