Access to Credit & Diminishing Community Banks
Back in March, The American Prospect published an article on small business access to capital, looking at some of the reasons why it persists despite growth in overall commercial and industrial lending, increases in consumer confidence, and consumer purchasing power back at pre-recession levels. The disadvantage for small businesses is growing:
Though GDP has now surpassed pre-recession levels, the roughly $1.3 trillion in outstanding commercial and industrial loans at the nation’s financial institutions is nearly 15 percent below the levels of mid-2008, according to the Federal Deposit Insurance Corporation (FDIC). A recent analysis by economists at the Federal Reserve Bank of Cleveland showed that the decline was most severe in the small-business sector, with loans of less than $100,000 declining 18.1 percent and loans between $100,000 and $250,000 down 16.7 percent.
The latest data also showed that the small-business disadvantage is growing. In last year’s third quarter, overall commercial and industrial lending grew by $44.8 billion, or 3.6 percent, over the previous quarter for its fifth consecutive gain. But smaller loans (those less than $1 million) fell by $3.1 billion, or 1.1 percent, according to the FDIC.
One reason cited by the article is that there has been a coinciding decline in community banks. While the Troubled Asset Relief Program (TARP) provided aid to the largest banks in getting the bad loans off their books, it did little to help smaller community banks that were also dealing with bad credit. This led to greater oversight and tougher standards on community banks, limiting their ability to make more loans. The number of community banks has fallen drastically– 13.1 percent from 2007.
The Federal Reserve Bank of Atlanta released an analysis yesterday that sheds more light on the relationship between community banks and small business lending. A survey of small businesses in their district revealed that these businesses had the highest success rate in obtaining credit from vendor trade credit and commercial loans or lines of credit from community banks. Small Business Administration loans and commercial loans and lines of credit from large banks were the least successful.
This just provides more proof that smaller, community-based lenders play an increasingly important role in sustaining small businesses. In particular, federal and state policy should be targeted toward those lenders that provide financing for the brick-and-mortar businesses that sustain communities and create local jobs. As the American Prospect article points out, many of the federal jobs initiatives are focused on high-growth, innovation technology sectors, which have little impact on Main Street:
The American dream of launching the next science-driven new thing, whether in computers, software, telecommunications, biotechnology, or clean energy, lives on, but its benefits accrue to select precincts, generally found along the coasts or in a handful of university towns across the heartland.