Larger financial institutions are increasing loans to big companies, but small business owners are still feeling the credit crunch.
U.S. Federal Reserve Chairman Ben S. Bernanke noted at a lending conference in July that there was a serious gap developing between large businesses that were building up cash and smaller ones still unable to get credit, and blamed tight credit for preventing small businesses from hiring.
"Making credit accessible to sound small businesses is crucial to our economic recovery," Bernanke said at the conference.
According to the National Small Business Association's 2010 Mid-Year Economic Report, 41% of small businesses were still having trouble obtaining credit in July.
Hostility toward the financial sector keeps growing as bank profits rise and lending amounts fall.
The banking sector's profits last quarter returned to levels not seen since before the financial crisis. The total profit last quarter for the more than 7,000 Federal Deposit Insurance Corporation insured banks hit $21.6 billion - a massive improvement from the sector's $4.4 billion loss the same quarter last year.
But while profits rose, lending fell by $95.7 billion.
The frustration of small businesses over the lack of funds and tight lending practices prompted this letter from a Money Morning reader:
Why is there money to lend, and low rates, but regulators are not allowing banks to lend?
Easy credit is not a crime, it is great for those that are seasoned business people with a history of running successful, profitable businesses in prudent, conservative manners. What has happened in the credit market is similar to a school teaching a foreign language and a few students learn all the curse words and because of that, that language is never taught again.
Those that have achieved good credit standing and a history of success should be funded to turn this economy around.
- Ira S.
It seems much of the lending problem arises with smaller banks.
Smaller institutions have not started lending much again as they are still concerned about exposing themselves to fragile markets, and more small regional banks are landing on the FDIC's list of "problem banks." The number of lenders risking failure is up to 829 and could hit 1,000 in early 2011.
These smaller banks are holding on to funds for safety.
But there's good news for credit-worthy borrowers as bigger banks are ready to lend again and are picking up the lending slack from troubled community banks. Big banks usually only allow a small portion of funds to lend to small business owners, but the more regional banks that crumble leaves the lending market open for more stable institutions.
The Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices in July reported that big banks were starting to ease lending standards to small businesses for the first time since 2006.
And some of the biggest banks have even kept promises made at the end of last year to meet lending goals to small businesses.
Bank of America Corp. (NYSE: BAC) pledged to increase small business lending by $5 billion this year, and has already met that goal. In the first half of 2010, BAC increased lending by $9 billion over the same period in 2009. It has also promised to limit rate increases to credit account holders and increase small business loans over the next five years.
JPMorgan Chase & Co. (NYSE: JPM) promised to lend $10 billion in new loans this year to companies with less than $20 million in revenue. It has increased lending so far this year by 37% and hired 235 small-business bankers. It has also granted $110 million in "second look loans" to applicants originally turned down.
Citigroup Inc. (NYSE: C) has doubled its small business lending so far in 2010, and Wells Fargo & Co. (NYSE: WFC) increased its small business loans to 30% last quarter.
Big banks say that they are in a good position to continue lending, and as long as demand picks up and money is borrowed, the economic recovery will strengthen.
"We're getting more comfortable with making loans and standards are easing, which is a good thing, but at the end of the day demand is the whole story," Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York, told Bloomberg. "The more pressing issue is still, how do we get businesses and people to borrow and invest."
(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Web site. Please include your name and hometown with your email.
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