Latest Federal Reserve Report on Small Business Lending…and Some Perspective

By SBE Council at 13 February, 2015, 11:22 pm

by Raymond J. Keating-

So, what are the banks up to these days regarding loans for businesses, including small firms?

On February 2, the Federal Reserve released its latest “Senior Loan Officer Opinion Survey on Bank Lending Practices.”

The Fed highlighted the following two major points:

Lending standards. “Regarding loans to businesses, the January survey results indicated that, on balance, banks reported little change in their standards for commercial and industrial (C&I) loans to firms of all sizes in the last quarter of 2014.”

Loan demand. “On the demand side, a modest net fraction of domestic banks reported having experienced stronger demand for C&I loans from large and middle-market firms. In addition, a modest net fraction of banks reported an increase in the number of inquiries from potential business borrowers regarding the availability and terms of new credit lines or increases in existing lines. Banks reported that loan demand from small firms had remained about unchanged on net.”

Regarding the specific details on loan demand, regarding C&I loans to large and middle-market firms, 68.5% said “about the same,” 24.7% “moderately stronger,” and 6.8% “moderately weaker.” As for loans to small firms, 82.9% of senior loan officers said demand was “about the same,” 11.4% “moderately stronger,” and 5.7% “moderately weaker.”

However, all of this information needs to be put in broader perspective. In early January, the Federal Reserve Bank of Cleveland reported on the trend in small business lending. In that report, it was noted: “But if the news is better, then the apt question is, ‘Better than what?’ Certainly, the upbeat tone of data released in recent months indicates that trends are moving in the right direction. At the same time, some of that progress represents just a fraction of the ground lost during the recession.”

In fact, serious concerns persist in terms of bank lending to small businesses. As explained in the Cleveland Fed report, small business lending is still down markedly from its pre-recession level: “The data show that the volume of small loans, those under $1 million, dropped significantly between 2008 and 2012, and has barely recovered. Small business loans now stand 17 percent below the peak reached prior to the recession. While small commercial and industrial loans grew 3.4 percent over the past year, this modest improvement does not provide strong assurances about the health of lending in this space. In contrast, lending to larger businesses (loans greater than $1 million) bounced back quickly and loans outstanding are now more than 24 percent higher than pre-recession levels.”

The Cleveland Fed summed up matters regarding what all of this means for the economy this way: “New and small firms serve an important function in our economy. Small businesses account for nearly half of private sector output and employment in the U.S. In addition, small firms – led by new small firms – have posted the highest net job creation rates going back to the 1970s. Coming out of the most recent recession, however, job creation by small businesses has lagged, and the new business formation rate continues to fall. While it is not clear that these trends are driven by weaker borrowing or limited access to loans, it is evident that businesses need adequate credit to succeed and grow.”

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

Keating’s book, published by SBE Council, is titled Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship. It’s available from Amazon.com here.