–19-Page Report on Meetings Details Reasons Lending Contracted

By Joseph Plocek

WASHINGTON (MNI) – In a separate 19-page document submitted to
Congress as part of the semiannual monetary policy report, the Federal
Reserve reported on its small business meetings held around the country
from February to June, saying lending contracted to these firms during
the recession due to both supply and demand factors.

The meetings, which ran from focus groups to large-scale formal
agendas, brought together small business owners and trade groups and
lenders. They were held in different regions of the country during the
first half of 2010.

Fed data indicated small business lending contracted by about $40
billion from the onset of recession through Q1:2010, and the report
confirms small businesses felt the pinch.

Comments about the supply of credit, which some banks reported
related to concerns about capital adequacy, fell into some broad
categories: tighter underwriting standards, resource constraints on
lending, tighter regulation, and the lessening of alternative funding
sources.

Small businesses reported that banks were focused on getting
additional collateral for loans during routine reviews, and on cash flow
as an indicator of repayment possibilities.

On the demand side, weakened balance sheets and slower sales were
said to make small business borrowers more cautious in seeking credit.
Small firms also expressed a need for greater technical assistance,
especially related to government contracting or start-up capital
proposals.

The report had several potential recommendations that officials are
planning to follow up on. Among these are a need for better dialogue
about supervision, greater lending in specialized programs such as
community reinvestment, ways to make tax credits more effective, and
enhancements to Small Business Administration programs that would waive
fees and increase credit guarantee limits, as well as extend
administrative and consulting support.

Lenders were encouraged to use “second look” programs to review
rejections or credit reductions, and to demonstrate greater commitment
to referring borrowers to alternative lenders.

Demonstrating the Federal Reserve System’s commitment to getting
credit flowing again, an appendix to the report detailed that all twelve
Federal Reserve Banks plan community affairs activities about small
business in the coming months.

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

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