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Saturday, October 10, 2009

Banks Reducing Lending to Small Businesses

by Calculated Risk on 10/10/2009 12:56:00 PM

From Rex Nutting at MarketWatch: Banks cutting back on loans to businesses

U.S. banks are reducing their lending at the fastest rate on record ... According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace.
The question is whether the decline in lending will be reversed soon.

... if the decline is mainly due to weak banks unable or unwilling to lend, then a turnaround in credit creation may have to wait until banks' balance sheets are repaired, a process that could be delayed by further expected defaults in consumer loans, mortgages and commercial real-estate loans.
There is more on small businesses including excerpts from NY Fed President William Dudley's speech: A Bit Better, But Very Far From Best, and from Atlanta Fed research economist Melinda Pitts: Prospects for a small business-fueled employment recovery

Net Employment by Business Size Click on graph for larger image in new window.

Graph Credit: Melinda Pitts, Atlanta Fed research economist and associate policy adviser

This graph breaks down net job gains and losses by firm size since 1992. During the current employment recession, small firms have accounted for about 45% of the job losses - much higher than during the 2001 recession.

Dr. Pitts cautions:
Looking ahead, it's not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery. However, if the above-mentioned financial constraints are a major contributor to the disproportionately large employment contractions for very small firms, then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries.