–Supply, Not Just Tepid Demand For Credit, Affect Small Biz Lending

By Brai Odion-Esene

WASHINGTON (MNI) – Total business loans under $1 million held by
small U.S. banks continue to dwindle, and disproportionate negative
growth at weak small banks is a major factor in this decline, a San
Francisco Federal Reserve Bank research note said Monday.

The paper argued that this supports the view supply conditions, not
just tepid demand for credit, have affected bank lending to small
businesses, and as a result impacting growth.

“While the recent increase of C&I loans under $1 million at strong
banks may signal a turnaround in demand, the drag on supply among weak
banks is likely restraining growth,” economist Elizabeth Laderman said.

The report’s author noted that portfolios of business loans under
$1 million at all small bank are shrinking even as these loans are
growing at the strong small banks. Financially weak small banks have
disproportionately accounted for this decline, she said.

“Although dollar volumes fell at a slower pace in the four quarters
that ended in June 2012 than over the previous year, the persistent
decrease remains a concern,” she added.

Laderman’s sample size is the 5,453 U.S. banks with assets under $1
billion in the second quarter of 2008 that she said did not combine with
another bank and were still operating in the fourth quarter of 2011.

The financial condition of these banks deteriorated during the last
year of the recent recession, she said, with the proportion of weak
banks over that period increasing to about 21% from about 10%. Between
the end of the recession and the fourth quarter of 2010 Laderman said
the proportion of weak banks further increased to about 31%.

She said business loans under $1 million are categorized as
commercial and industrial (C&I) or commercial real estate (CRE) if they
are secured by real property.

“Persistent deterioration in the performance of CRE loans under $1
million at small banks probably contributed to the increasing proportion
of weak banks,” Laderman said, noting that, in aggregate, CRE loans make
up about 60% of the dollar volume of business loans under $1 million at
small banks.

The San Francisco Fed report does not completely lay the blame at
the feet of declining supply, however, acknowledging that the recent
shrinkage of loans under $1 million at small banks appears to be at
least partially due to falling demand for such loans. It cited the
National Federation of Independent Business, which reports that only 8%
of the small businesses it surveys report that they can’t get all the
credit they need.

Laderman focused on three time periods: the four quarters ending in
the second quarter of 2009; the four quarters ending in the second
quarter of 2010; and the full calendar year 2011.

She said the subdued demand for C&I loans may have pulled down even
strong bank loan volumes in the earlier period, and that their increase
in the later period may signal some rejuvenation.

“However, even if demand for C&I loans under $1 million at small
banks is gaining some traction, supply constraints among the weak banks
may be impeding loan growth,” Laderman said. “Whether we soon see net
growth in C&I loans under $1 million at small banks will depend on the
balance between demand and supply factors.”

** MNI Washington Bureau: 202-371-2121 **

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