Academic journal article Federal Reserve Bulletin

Statement to the Congress

Academic journal article Federal Reserve Bulletin

Statement to the Congress

Article excerpt

I am pleased to be here today to discuss the environment for small business financing: and the role of banks in providing credit to small firms.

Small businesses are a vital part of our economy. They play a key role in the generation of jobs, new ideas, and die preservation of the entrepreneurial spirit; no one would question the contribution that a thriving small business sector makes to die well-being of our nation. It is therefore appropriate that small businesses hold a special place in the considerations of policy-makers at all levels of government.

The Federal Reserve Board has devoted considerable effort to building our knowledge of the characteristics of small businesses and their use of financial services. As the committee is aware, we have recently completed our second National Survey of Small Business Finances; Board staff are now processing the results of extensive interviews with more than 5,000 small business owners around the country. Some of the early findings from the survey were published in the July 1995 Federal Reserve Bulletin, and we will continue to analyze and report on the data as they become available. I will refer to this and other survey information in my remarks this morning.

Credit Availability Today

As I developed my thoughts for this hearing, I came to appreciate how much more pleasant it is to report on conditions in good times than in bad times. When Chairman Greenspan appeared before this committee in early 1993, a tepid recovery from recession was beginning to give way to more solid expansion. But commercial banks were still struggling with severe loan problems that had resulted from excessive optimism in real estate and certain other loan markets in the 1980s. Because of large loan losses, many depository institutions had failed or been merged. Although there were signs in 1993 that banks were on the mend, credit conditions generally remained quite tight. The sting of the "credit crunch" was still a fresh memory in the minds of borrowers and lenders, not to mention policymakers.

Out of concern that exaggerated lending restraint might have been fostered by regulatory and legislative reactions to the numerous problems in the industry, the regulatory agencies undertook an extensive review of their policies and practices. This review produced a number of measures aimed at removing impediments that might stand in the way of lending to creditworthy borrowers. Former Federal Reserve Governor John LaWare, in testimony two years ago, highlighted for this committee many of these changes.

Since then, the agencies have continued their efforts to reduce the burden of regulation and to ensure that examiners evaluate bank lending in a consistent, prudent, and balanced manner.

I think we would all agree that the financial environment today is markedly improved from that of 1993. Although undoubtedly there remain pockets of weakness and problems for individual small businesses, a wide array of statistical indicators suggest that access to bank credit has eased appreciably for all businesses. Business loans at banks have expanded rapidly since 1993. Indeed, the volume of commercial and industrial loans at banks grew strongly in 1994 and then last year registered its largest percentage increase in more than a decade (13 percent).

Small businesses have participated in this expansion. Data collected from banks in their June Call Reports reveal that small commercial loans (defined as loans of $1 million or less and including those secured by commercial real estate) increased more than 7 percent between June 1994 and June 1995. Roughly one-third of the growth in small loans over that period occurred at 7,000 mostly small and regional banks whose business loan portfolios comprise only small loans.

A good portion of the expansion, however, was at large banks (those with assets of $5 billion or more). Part of the growth at large banks reflected the effect of bank mergers that moved more banking assets into the largest size categories. …

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