Bernanke: ‘Vital’ to Stay Focused on Small-Biz Loan Problems

DETROIT (MNI) – The following is the text of Federal Reserve
Chairman Ben Bernanke’s remarks Thursday prepared for a small business
roundtable:

Thank you, President Evans. I am pleased to be here in Detroit to
be part of an ongoing and very important discussion about improving
access to credit for small businesses. I would particularly like to
thank the staff of the Federal Reserve Bank of Chicago and President
Evans for organizing this event.

Today’s meeting is part of a series of more than 40 such gatherings
that the Federal Reserve System is conducting across the country.
Entitled Addressing the Financing Needs of Small Businesses, these
forums are designed to elicit ideas and information that will help the
Federal Reserve and others respond effectively to both the immediate and
longer-term concerns of small businesses. Today’s event brings together
representatives from banks and other private lenders, community
development financial institutions, bank supervisors, other federal and
local government agencies, and small business trade groups. Each of you
brings an important perspective to this issue, and I would like to thank
all of the participants for their willingness to share their ideas.

Over the past two years, a concerted effort by the Federal Reserve
and other policymakers has helped to stabilize our financial system and
our economy. Following a sharp contraction in late 2008 and early 2009,
we are now in the fourth quarter of economic expansion, with jobs once
more being created rather than destroyed. Nonetheless, important
concerns remain. One particularly difficult issue is the continued high
rate of unemployment. High unemployment imposes heavy costs on workers
and their families, as well as on our society as a whole. I raise this
issue here because healthy small businesses, including start-ups as well
as going concerns, are crucial to creating jobs and improving employment
security.

Unfortunately, lending to small businesses has been declining.
Indeed, outstanding loans to small businesses dropped from almost $700
billion in the second quarter of 2008 to approximately $660 billion in
the first quarter of 2010. An important but difficult-to-answer question
is how much of this reduction has been driven by weaker demand for loans
from small businesses and how much by restricted credit availability. To
be sure, the distinction between demand and supply is not always easy to
make. For example, some potential borrowers have been turned down
because lending terms and conditions remain tighter than before the
financial crisis, perhaps reflecting banks’ concerns about the effects
of the recession on borrowers’ economic prospects and balance sheets.
From the potential borrowers point of view, particularly a borrower who
has been able to obtain loans in the past, these changes may feel like a
reduction in the supply of credit; from the lender’s point of view, the
problem appears to be a lack of demand from creditworthy borrowers.
Although lenders and borrowers may have different perspectives, our
collective challenge is to help ensure that creditworthy borrowers have
access to credit so that, should they choose, they can expand their
businesses or increase payrolls, helping our economy to recover.

At the Federal Reserve, we have been working to facilitate the flow
of credit to viable small businesses. We helped in bringing capital from
the securities markets to small businesses through the Term Asset-Backed
Securities Loan Facility–the TALF program. Our bank stress tests of a
year ago also drew private capital to the banking system, which helped
offset credit losses and provided the basis for increased lending. I An
important but difficult-to-answer question is how much of this reduction
has been driven by weaker demand for loans from small businesses and how
much by restricted credit availability. To be sure, the distinction
between demand and supply is not always easy to make. For example, some
potential borrowers have been turned down because lending terms and
conditions remain tighter than before the financial crisis, perhaps
reflecting banks concerns about the effects of the recession on
borrowers economic prospects and balance sheets. From the potential
borrowers point of view, particularly a borrower who has been able to
obtain loans in the past, these changes may feel like a reduction in the
supply of credit; from the lenders point of view, the problem appears
to be a lack of demand from creditworthy borrowers. Although lenders and
borrowers may have different perspectives, our collective challenge is
to help ensure that creditworthy borrowers have access to credit so
that, should they choose, they can expand their businesses or increase
payrolls, helping our economy to recover.

As we continue to examine the factors affecting small business
lending, our thinking will be shaped by information from diverse
sources. For example, our most recent Senior Loan Officer Opinion Survey
on Bank Lending Practices suggests that, for the first time since the
crisis began in 2007, most banks have stopped tightening credit
standards. We also know, from the survey conducted by the National
Federation of Independent Business that while only 8 percent of small
businesses list access to credit as their principal immediate economic
problem, just 40 percent of small businesses attempting to borrow in
2009 had all of their credit needs met.

Surveys like the two I just mentioned are informative, but getting
a full picture also requires hearing from knowledgeable people with
diverse perspectives on these issues. Meetings like this one allow us to
gather intelligence we and others can use to facilitate the flow of
credit to small businesses–for instance, by identifying specific credit
gaps, clarifying examiner expectations and procedures, improving
coordination of small business support services, and ensuring the
availability of technical assistance for loan applications. Thus we can
help ensure that small businesses are able to participate in and
contribute to the recovery. The findings from the entire series of
meetings sponsored by the Federal Reserve will be presented at a
culminating conference at the Board of Governors in Washington later
this summer.

Learning from people engaged with small businesses and small
business credit, like those here today, is vital if we are to make
progress. I look forward to hearing your ideas and concerns, and thank
you again for joining us.

—

1 Data are from the Federal Financial Institutions Examination
Council (FFIEC) Consolidated Reports of Condition and Income (Call
Report), where small business loans, as reported in the Report forms
FFIEC 031 and 041, schedule RC-C, part II, are defined as loans with
original amounts of $1 million or less that are secured by nonfarm
nonresidential properties or commercial and industrial loans plus loans
with original balances of $500,000 or less for agricultural production
or secured by farmland.

2 For example, see Board of Governors of the Federal Reserve
System, Federal Deposit Insurance Corporation, National Credit Union
Administration, Office of the Comptroller of the Currency, Office of
Thrift Supervision, and Conference of State Bank Supervisors (2010),
“Regulators Issue Statement on Lending to Creditworthy Small
Businesses,” joint press release, February 5,
www.federalreserve.gov/newsevents/press/bcreg/20100205a.htm.

3 See the April 2010 Senior Loan Officer Opinion Survey on Bank
Lending Practices available on the Board of Governors website at
www.federalreserve.gov/boarddocs/snloansurvey.

4 See William J. Dennis, Jr. (2010), Small Business Credit in a
Deep Recession (Washington: National Federation of Independent
Business., February), available at www.nfib.com/research-foundation.

** Market News International Washington Bureau: 202-371-2121 **

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