Small Business Lending Continues to Stagnate But Causes are Complex

by Mercator Advisory Group 0

A report last week from the Federal Reserve Bank of Cleveland pulls together and analyzes some of the factors contributing to “ Why Small Business Lending Isn’t What It Used to Be.” The authors, Ann Marie Wiersch and Scott Shane, examine multiple angles, including the lack of demand, tightening of standards for supply, and general inefficiency of lending in small business portfolios. Given the importance of small business as an engine of growth, they express concern about the potential remedies:

Since the Great Recession, bank lending to small businesses has fallen significantly, and policymakers have become concerned that these businesses are not getting the credit they need. Many reasons have been suggested for the decline. Our analysis shows that it has multiple sources, which means that trying to address any single factor may be ineffective or make matters worse. Any intervention should take all of the many causes of the decline in small business lending into consideration.

The data can be deceptive, since data on loans under $1 million from FDIC call reports must, by definition, steadily decline as a percent of total bank assets in the face ongoing bank and corporate consolidation. Nevertheless, the report highlights the difficulty of correcting a problem with so many different contributing factors. It contains no answers, but usefully points out why solutions to the decline of small business lending will be hard to find.

Click here to read more from the Fed.