Small Business Update on Bank Lending

By at 9 May, 2017, 4:33 pm

by Raymond J. Keating-

The Federal Reserve released its latest Senior Loan Officer Opinion Survey on Bank Lending Practices on May 8, which looks at “changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months.”

A few key points regarding small business:

Easing Terms on Small Business.  On commercial and industrial (C&I) loans:

“Banks … reported easing some of the terms of C&I loans to small firms. Specifically, a moderate net share of banks narrowed the spread of C&I loan rates over their cost of funds. Modest net percentages of banks also reported increasing the maximum size of credit lines and maturity of loans and lowering the cost of credit lines, while the remaining terms surveyed remained basically unchanged on net.”

More Competition.  As for why there have been at least some changes over the last three months:

“Major net shares of domestic banks that reported having eased either their standards or terms on C&I loans over the past three months cited more aggressive competition from other banks or nonbank financial institutions and a more favorable or less uncertain economic outlook as important reasons.”

Mixed Reasons for Weaker Loan Demand Cited by Some Banks.  On the demand side of the business lending equation:

“Regarding the demand for C&I loans, modest net shares of domestic banks reported weaker demand for C&I loans from firms of all sizes during the first quarter. Meanwhile, banks reported that inquiries for C&I lines of credit were basically unchanged.” As for the “whys” behind this, it was noted: “Major net fractions of banks that reported weaker C&I loan demand noted the following as important reasons: decreases in customers’ investment in plant or equipment and decreases in customers’ merger and acquisition financing needs. In addition, significant net shares of banks cited lower customer inventory and accounts receivable financing needs, lower precautionary demand for cash or liquidity, increases in customers’ internally generated funds, and a shift in customer borrowing to other banks or nonbank financial institutions as important reasons for weaker C&I loan demand.”

Recovering But Long Way To Go

Finally, to put these comments in some perspective, according to the FDIC, the value of small business C&I loans (less than $1 million) have grown in each quarter since September 2013 – with loan balances going from $283.9 billion to $331.1 billion at the end of 2016 (latest data available). Similarly, the number of small business C&I loans have grown from 21.6 million in June 2013 to 25 million at the end of 2016.

However, it also must be noted that the previous highs were $336.4 billion in small business C&I loans value in 2008, and 25.4 million in terms of the number of such loans also in 2008. So, we are not yet back to those levels some eight or so years later – never mind the lost growth compared to where we should be.

Looking ahead, recent numbers and the longer trend on small business lending fits in with the wider story on the economy, investment and entrepreneurship, all pointing to a need for pro-growth policymaking. And that most certainly includes rolling back regulatory burdens not just on small businesses, but on the financial institutions, of all sizes, that provide credit and financial capital. Critical is dealing with the misguided and costly measures included in the Dodd-Frank financial regulation law (for example, see SBE Council’s recent analyses: Recommended Reading on Dodd-Frank and its Aftermath and Dodd-Frank and its Aftermath: The Need to Accelerate Reform ).

In the end, regulatory relief and reform will incentivize entrepreneurs to startup and expand businesses, and incentivize financial institutions to provide the necessary financing.


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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