The Worrisome Trends in Small Business Lending, Solutions in the Pipeline

By at 7 September, 2017, 4:57 pm

by Raymond J. Keating-

The Federal Deposit Insurance Corporation (FDIC) publishes lending data, including bank loans for small businesses. According to the latest numbers from June 2017, 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.

Consider some key points from the FDIC data.

Commercial & Industrial Small Business Loans

First, small business commercial and industrial loan balances (that is, loans of less than $1 million) have been growing since 2013. The June 2017 level of $337 billion compared to the recent low of $279 billion in September 2013. However, June 2017 small business C&I loan balances were roughly the same amount as the 2008 level of $336 billion. So, in effect, there has been no growth in small business loan balances for nearly a decade.

Also, it must be noted that small business C&I loan balances as a share of total C&I loan balances ran between 27 percent and 35 percent over the period of 1995 to mid-2011. Subsequently, though, this share has declined to only 20 percent.

The data on the number of small business C&I loans basically line up with loan balance trends. The number of such loans registered 25.4 million in 2008, fell to 19.7 million at the end of 2010, and have climbed back to 25.2 million in June 2017. Again, no effective growth for almost a decade.

Nonfarm Nonresidential Small Business Lending

Second, the trend on small business nonfarm nonresidential loan balances (defined by the FDIC as “secured by real estate as evidenced by mortgages or other liens on nonfarm nonresidential properties, including business and industrial properties, hotels, motels, churches, hospitals, educational and charitable institutions, dormitories, clubs, lodges, association buildings, ‘homes’ for aged persons and orphans, golf courses, recreational facilities, and similar properties”) has been far worse. Since the high of $375 billion in 2008, small business nonfarm nonresidential loan balances have steadily declined, registering $281.8 billion in June 2017.

As a share of total nonfarm nonresidential loan balances, the small business share dropped from 52 percent in 1995 to 37 percent in 2008, and continued to tumble to 21 percent in June 2017.

As for the number of small business nonfarm nonresidential loans, they grew from 1995 to 2007, reaching a high of 2.46 million, then subsequently dropped to 1.26 million in June 2017.

Total Small Business Lending

Finally, looking at total small business lending (including agriculture), loan balances hit a high of $780.6 billion in 2008, subsequently tumbled to $647.9 billion in March 2013, and then grew to $695 billion in June 2017. The small business share of such loans has steadily declined, from 40 percent in 2004 to 21 percent in June 2017. As for the number of small business loans, it’s worth noting that these grew from 7.99 million in 1995 to 28.45 million in 2008. The number then declined to 22.36 million in March 2011, and subsequently climbed to 27.7 million in June 2017.

Get the Policy Climate Right – Action in the U.S. Congress

These generally disappointing trends in small business lending – largely a story of decline and sluggish recovery – are not about big banks putting down the little guy, as populists would argue. Rather it’s a reflection of diminished levels of entrepreneurship and fewer businesses in the U.S. (see SBE Council’s analysis), an under-performing economy and its assorted causes (see SBE Council’s analysis), as well as a hostile regulatory environment for financial institutions (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 ).

Thankfully, there are policy solutions being considered and advanced in the U.S. Congress. For example, in June of this year the House passed H.R. 10, the Financial Choice Act, a comprehensive bill supported by SBE Council  that addresses a broad range of excessive regulation and regulatory practices that are hurting the cost and availability of capital, community banks, as well as innovation in the financial services industry.  On September 7, the House Financial Services Committee, Subcommittee on Financial Institutions and Consumer Credit, hosted a hearing to examine various pieces of legislation to improve the regulatory environment and strengthen economic growth.  H.R. 3312, the Systemic Risk Designation Improvement Act, sponsored by Representative Blaine Leutkemeyer (R-MO) who chairs the subcommittee, was one such piece of legislation examined. This bipartisan legislation would replace the arbitrary $50 billion threshold on banks, which triggers higher levels of regulation, with more appropriate measures to determine their risk to the financial system. As noted by Chairman Leutkemeyer in a media release at the conclusion of the hearing:

“This legislation aims to improve the manner in which financial institutions are regulated by more closely tying the safeguards intended in the designations of systemically important financial institutions, or SIFIs, with actual risk posed to the financial system. More specifically, the legislation replaces the inflexible, arbitrary $50 billion threshold for designation with a series of standards that more accurately measure systemic importance. This legislation requires that the Federal Reserve review an institution’s size, interconnectedness, substitutability, global cross-jurisdictional activity, and complexity.”

The arbitrary threshold and its regulatory costs and restrictions are limiting the ability of mid-size banks to lend and provide credit. Of course, small businesses need capital and credit to operate with certainty and to scale when opportunities arise.

Legislation similar to H.R. 3312 passed the House in the last Congress, and it is important to get this bill to President Trump’s desk this year.

For stronger economic growth, it is vital to get the policy climate right for private investment, entrepreneurship and lending.  An improved regulatory and policy environment will lead to an improvement in business and lending activity.  This is an outcome that all should welcome and support.


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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