WASHINGTON (MNI) – Following is the second and last part of the
text of Federal Reserve Chairman Ben Bernanke’s remarks Monday at the
Federal Reserve Meeting Series on “Addressing the Financing Needs of
Small Businesses:”

Though we believe that our and others’ efforts are making a
difference, we also know more must be done, and that additional
effective action requires hearing firsthand from knowledgeable people
who can speak from diverse perspectives about the challenges facing
small businesses. The insights we obtained from small business owners,
lenders, and others in this series of meetings have given us a more
nuanced understanding of the problem and will help us identify areas
where we might be able to do more. Not surprisingly, these meetings
confirmed that facilitating small business financing is not a simple or
straightforward matter. Notably, the term small business encompasses a
heterogeneous mix of enterprises, ranging from pizzerias to start-up
technology firms, and each small business faces a unique combination of
local economic conditions and complex relationships with customers,
suppliers, and creditors. Hence we should be wary of one-size-fits-all
solutions.

One of the most important themes underscored during the meetings is
that solving the issues faced by small businesses will require
collaboration. The meeting series itself served as a model of
collaboration, interactive discussion, and cooperative problem solving.
Participants included community affairs officers, bank supervisors,
economists, and policymakers from the Federal Reserve. We involved our
fellow bank regulators, the Small Business Administration, and the
Community Development Financial Institutions Fund. And, of course, small
businesses and lenders played a central role. The meetings fostered
stimulating conversations. Lenders heard from small business owners
about their frustrations over tightened credit. Likewise, lenders were
able to explain the considerations that go into making a small business
loan. And regulators heard, in detail, concerns expressed about the
effect their procedures and guidance would have on small business
lending.

Some common themes emerged from the sessions. Business owners
frequently noted that the declining value of real estate and other
collateral securing their loans poses a particularly severe challenge.
As one business owner at the Detroit meeting I attended put it, If you
thought housing had declined in value, take a look at what equipment is
worth. Business owners cited credit lines and working capital as their
most critical financial needs, followed by refinancing products that
would permit them to take advantage of low interest rates. Many reported
having had to resort to borrowing through their personal credit cards or
from their retirement accounts. Several mentioned the need for
small-value loans in amounts less than $200,000 as well as the need for
‘patient capital’ from investors willing to commit funds for 5 to 10
years without an expectation of immediate returns.

Some of the lenders that participated in our meetings expressed the
view that current lending conditions dont represent credit tightening
as much as a return to more traditional underwriting standards following
a period of too-lax standards. But, though some lenders said they were
emphasizing cash flow and relying less on collateral values in
evaluating creditworthiness, it seems clear that some creditworthy
businesses– including some whose collateral has lost value but whose
cash flows remain strong–have had difficulty obtaining the credit that
they need to expand, and in some cases, even to continue operating. The
challenge ahead for lenders will be to determine how to assess the
credit quality of businesses in an uncertain and difficult economic
environment. It is in lenders interest, after all, to lend to
creditworthy borrowers; ultimately, thats how they earn their profits.
Regulators, for their part, need to continue to work with lenders to
help them do all that they prudently can to meet the needs of
creditworthy small businesses.

Making credit accessible to sound small businesses is crucial to
our economic recovery and so should be front and center among our
current policy challenges. We are pleased that you have accepted our
invitation to participate in todays discussion of next steps in the
effort to promote small business finance. You each bring valuable
insights and perspectives to this issue, and I would like to thank you
all for your willingness to share your ideas.

(1) Small businesses are defined here as firms with fewer than 500
employees.

(2) See John Haltiwanger, Ron S. Jarmin, and Javier Miranda (2010),
Who Creates Jobs? Small vs. Large vs. Young, working paper (February);
and the U.S. Census Bureaus Business Dynamics Statistics database for
statistics on job creation for new and small businesses
(www.ces.census.gov/index.php/bds).

(3) William C. Dunkelberg and Holly Wade (2010), NFIB Small
Business Economic Trends (Nashville: NFIB Research Foundation, June),
www.nfib.com/Portals/0/PDF/sbet/sbet201006.pdf.

(4) Data are from the Federal Financial Institutions Examination
Council (FFIEC) Consolidated Reports of Condition and Income (Call
Report), where loans to small businesses, as stated in the reporting
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 are commercial and industrial loans, plus
loans with original balances of $500,000 or less that are secured by
farmland or are for agricultural production.

(5) Charge-offs have also contributed to the decline in outstanding
credit.

(6) 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.

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

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