Abstract
In the early years following the financial collapse, federal officials and others believed that banks were not making loans to creditworthy small firms, who have accounted for most of the job creation in the United States in recent decades. Acting on this belief, a number of programs were created to increase bank lending to small firms. Overall, however, the data collected since the 2007/8 financial crisis suggest that the explanation for slow loan growth in the small business sector is not a result of supply constraints but rather a result of anemic loan demand among small firms. Thus, recent programs intended to increase small business borrowing through easing credit supply were doomed to fail. The weak demand for credit among small firms is representative of the sluggish performance of the small business economy postrecession, a marked contrast to the robust performance of larger firms and a reflection of a bifurcated economy.
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Notes
Treasury and Federal Reserve officials were especially concerned that banks would (as is typical following a financial crisis) pull back on lending, leading to a reduction in credit available to the private sector. For example, during the Small Business Financing Forum hosted by the Small Business Administration in November 2009, former Treasury Secretary Geithner noted that “[s]mall businesses … [faced] a very challenging credit environment” and expressed his concern that “[although the demand for credit necessarily falls in a recession, particularly one following a long period of excessive borrowing, the risk is that banks over-correct, forcing viable businesses to lay off workers, reduce wages, close factories, and defer investments.” Concurrently, the Federal Reserve was also keen to ensure that community banks continued to lend to creditworthy customers despite a recessionary environment caused in no small part because of earlier poor underwriting standards. For example, in remarks made at the independent Community Bankers of America’s National Convention in March 2009, Chairman Bernanke noted that although bankers “have expressed concern over some of the ‘mixed messages’ they perceive are coming from the federal banking agencies in the current environment—particularly admonitions to continue lending at the same time that institutions are being urged to maintain adequate capital and prudent lending standards … banks can and should continue to provide loans to creditworthy customers.” And in his April 2013 testimony to Congress, Chairman Bernanke characterized lenders as being “too conservative,” that is, not taking enough risk. Those actually carrying out the process of bank supervision did not seem to have the same desire for “risk taking” that top Fed officials seemed to have.
The small business sector of the economy, defined by the U.S. Small Business Administration (SBA) as the population of employer firms with fewer than 500 employees, accounts for more than half of private nonfarm GDP, half of private sector employment, and roughly two-thirds of net new jobs created in the United States over the past 17 years. More information on this sector is available in the SBA’s FAQ sheet available at http://archive.sba.gov/advo/stats/sbfaq.pdf.
According to SBA data, depository lending institutions with less than $1 billion in assets accounted for 31.3 percent of total small business loans outstanding (loans of $1 million or less) in 2012 made by such institutions. Depository lending institutions with less than $10 billion in assets accounted for 51.8 percent of small business loans.
An informative discussion of the differences between the “cookie-cutter” and “character” approaches to small business lending is contained in Cole, Goldberg, and White [2004].
No data available prior to 1995.
The monthly NFIB Small Business Economic Trends survey data are publicly available at http://www.nfib.com/research-foundation/surveys/small-business-economic-trends.
A typical headline describing the credit crunch at the time is encapsulated in the Wall Street Journal’s September 17, 2008 article, “Lending among Banks Freezes,” by Mollenkamp, Whitehouse, and Shah [2008]. Banks are supposed to lend to businesses and consumers.
New firm starts declined from the 2007 level by 220,000 as well.
A description of the Term Asset-Backed Securities Loan Facility may be found at http://www.federalreserve.gov/monetarypolicy/talf.htm.
It is possible that the small business collateral asset class does not fully capture the amount of TALF loans that went to help small businesses. A subset of TALF loans backed by other collateral asset classes such as auto, credit card, and floor plan may also have supported small firms.
For example, in remarks made at a November 2009 Small Business Conference, former Treasury Secretary Geithner noted that since the government launched the TALF program, “new issuance of asset-backed securities, including loans that directly help small businesses… averaged $14 billion per month, compared to less than $1 billion [in fall 2008].” In his remarks, former Secretary Geithner did not provide an estimate of how much of the total TALF loan volume directly aided small businesses.
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 111. Assurances.
The complete list of possible answers includes “taxes,” “inflation,” “poor sales,” “financing and interest rates,” “cost of labor,” “government regulation(s) and red tape,” “competition from large businesses,” “quality of labor,” “cost or availability of insurance,” and “other.”
References
Board of Governors of the Federal Reserve System, 2006. Financial Services Used by Small Businesses: Evidence from the 2003 Survey of Small Business Finances, Federal Reserve Bulletin, October.
Cole, Rebel A., Lawrence G. Goldberg and Lawrence J. White 2004. “Cookie-Cutter vs. Character: The Micro Structure of Small-Business Lending by Large and Small Banks.” Journal of Finance and Quantitative Economics, 39 (2): 229–230.
Dunkelberg, William C. and Jonathan A. Scott 2009. “Response of Small Business Owners to Changes in Monetary Policy.” Business Economics, 44 (1): 37.
Mollenkamp, Carrick, Mark Whitehouse and Neail Shah . 2008. “Lending Among Banks Freezes.” Wall Street Journal, September 17.
Special Inspector General for the Troubled Asset Relief Program, 2013. Banks that Used the Small Business Lending Fund to Exit TARP, April 9.
U.S. Small Business Administration, Office of Advocacy, 2013. Small Business Lending in the United States 2012, July.
Additional information
*Michael J. Chow is a Senior Data Analyst at the National Federation of Independent Business Research Foundation. He has previously worked for the Office of Economic Policy and Analysis at the Department of Labor and for the President’s Council of Economic Advisers. He received an M.Sc. in Econometrics and Mathematical Economics from the London School of Economics and a B.S.E. in Electrical Engineering from Princeton University.William C. Dunkelberg is the Chief Economist of the National Federation of Independent Business. He is also Emeritus Professor of Economics and former Dean of the School of Business and Management of Temple University. He received B.A., M.A., and Ph.D. degrees in economics from the University of Michigan and has served on the faculties of the University of Michigan, Stanford University, and Purdue University. Dr. Dunkelberg is also Chairman of the Board of Liberty Bell Bank and has served as Study Director at the Survey Research Center, with responsibility for the Survey of Consumer Finances. He is also a past president and a Fellow of NABE.
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Chow, M., Dunkelberg, W. Small Business Borrowing and the Bifurcated Economy: Why Quantitative Easing Has Been Ineffective for Small Business. Bus Econ 48, 214–223 (2013). https://doi.org/10.1057/be.2013.27
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DOI: https://doi.org/10.1057/be.2013.27