We’ve already discussed in some detail the difficulty of discerning how much of the decline in small business lending is driven by the balance sheet constraints of lenders vs how much is from businesses simply not needing loans. (With recent NFIB surveys of small businesses strongly suggesting it’s the latter).
Julie Stackhouse, a St Louis Fed senior vice president, covers some of the same ground in a new article, but she also reports on a series of meetings earlier this year between the Fed and small business owners, trade groups, banks, and regulators:
Data from the Federal Reserve’s Senior Loan Officer Survey suggests that standards on traditional bank loans (often called “relationship-based lending”) have tightened overall from where they stood a few years ago. Some bankers suggest that the tightening was long overdue; others suggest that some relaxation may occur as the economy improves. In any event, some borrowers are seeing the impact through additional collateral requirements, a greater focus on cash flow in analyzing creditworthiness, the requirement for more equity in the proposal or a request for personal guarantees. For some borrowers, these conditions cannot be met. …
But the data only support this up to a point, as things have changed a bit since these discussions took place. The latest results from the same Fed loan survey actually show that lending standards have started to loosen again. The chart itself shows the same thing, so this is probably another point in favour of those who think demand is to blame for the decline.
But this part of Stackhouse’s report was interesting:
Tightening credit conditions have been seen not only in relationship-based credit; they are also revealed in the cost-efficient credit generated through automated underwriting systems used by some larger banks. These systems have emerged over the past 15 years and rely on models that are driven primarily by credit scores. Some forms of automated credit are unsecured, such as credit card lines. Other forms are supported by collateral, and frequently, by commercial real estate. Credit generated through automated underwriting mechanisms tends to be procyclical, meaning more credit is available during strong economic times, and less credit is available during periods of economic stress. If a borrower’s credit score has declined, or the value of the collateral reduced, then the credit line may be reduced. Some banks using these models have introduced “second look” programs. Those denied credit under the automated system may appeal the decision such that they receive second evaluations.
Small business performance has been shown to have a strong correlation with conditions in commercial real estate, which itself affects small banks, and so on — and finding out how much of the decline is a supply vs a demand problem would therefore be quite useful. Among other things, it would to help us understand whether ideas like the recently passed $30bn bill are good ones.
But it simply remains the case that determining this question conclusively requires better data — a point made by none other than Ben Bernanke in his own summary of the Fed’s meetings earlier this year.
Related links:
Bank lending to small businesses: supply v demand – FT Alphaville
Small business outlook: still grim – FT Alphaville