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Small business borrowing and the bifurcated economy: why quantitative easing has been ineffective for small business.

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. however, the data collected since the 2007/8 financial crisis suggest dial 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 Tail. 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.

Business Economies (2013) 48, 214-223. doi:10.1057/be.2013.27

Keywords: small business: quantitative easing; credit crunch; credit demand

In the early years following the financial collapse, federal officials, particularly at the Treasury Department and the Federal Reserve, attributed much of the slow recovery of employment to restrictive lending practices by commercial banks. (1) The allegation made was that banks were not making loans to creditworthy applicants, although it was never made clear how the Treasury and Federal Reserve defined creditworthiness or how those institutions determined that banks were turning down profitable business loans. Nevertheless, acting on this belief, policymakers created a number of programs intended to increase bank lending to small firms. Supposedly, this would lead to higher employment and more economic growth.

To a large degree, these programs proved unsuccessful because policymakers failed to appreciate the fact that firms only borrow money when it can be deployed in projects that promise a high likelihood of at least returning the capital needed to repay the loan (and hopefully some profit). Reducing interest rates to historically low levels through quantitative easing (QE) did not produce the desired increase in spending in part because the recession was so deep, consumers and households were deleveraging, and economic policy in general was producing significant uncertainty about future policy and economic growth. And while money center banks have been able to make substantial profits trading off of Federal Reserve policy, community banks have not been able (allowed) to. Rarely mentioned, also, is the reduction of interest income by half a trillion dollars a year which has had a negative effect on spending. Even though community banks are paying less on savings deposits today, the other costs of lending are not proportionately lower for small banks, so lending rates cannot be reduced to the same degree that money center banks can enjoy--borrowing Federal Funds at, say, 15 basis points while earning at least 25 basis points on billions of associated Excess Reserves.

Given the small business sector's importance for job creation, policymakers focused on lending during the last few years to small firms. (2) The reasoning of policymakers was based on the premise that a credit crunch existed in the small business economy in the wake of the financial crisis, introducing severe financial pressures that forced many small firms to retrench and limited their ability to expand. This paper will argue that while a reduction in credit availability in the form of interbank lending among large banks may have occurred, small firms by and large were not as seriously impacted by reduced credit access. One possible explanation for this outcome is that small banks (an important source of small business financing (3)) rely heavily upon relationships with firms who had preexisting deposit relationships with the banks in question ("relationship banking"). Small banks, which rely less on cookie-cutter approaches to lending used by large banks that depend heavily on quantitative indicators, may have been more willing to continue extending credit to small firms throughout the recession with whom they had preexisting relationships than their larger counterparts. (4)

Data from the National Federation of Independent Business (NFIB) support the hypothesis that the moderate sluggishness of small business borrowing, in recent years was a phenomenon driven more by a lack of demand for credit than any supply-side constraints. Such dynamics explain the general ineffectiveness of recent policies to boost small business lending. The weak demand for credit among small firms is representative of the anemic performance of the small business economy postrecession, a marked contrast to the robust performance of larger firms (that operate in global markets) and a reflection of a bifurcated economy at present.

1. Credit Demand and Supply as Influences on Recent Small Business Lending

Generally speaking, lending to small businesses mirrored credit behavior in the broader economy in the lead-up to the financial collapse. Lacking the access to capital markets that large firms frequently have available, the primary source of external financing for small businesses are depository lending institutions (commercial banks, thrifts, and credit unions) [U.S. Small Business Administration, Office of Advocacy 2013].

According to the most recent Survey of Small Business Finances conducted by the Federal Reserve Board, commercial banks are the most common supplier of credit lines, loans, and capital leases to small businesses, providing about 41 percent of small firms with such services in 2003 [Board of Governors of the Federal Reserve System 20061.

The commercial and industrial (C&I) loans provided by depository institutions that small firms use (defined as loans of $1 million or less) to fund operations and finance capital investments grew steadily from 1995 to 2007, the peak of the housing boom, as shown in Figure 1. Loans to large firms grew far faster and also peaked in 2007 before plunging during the recession. Although loans to large firms have since recovered to their precrisis peak, loans to small firms steadily declined into late 2012 before showing some signs of improvement. This trend occurred even as excess reserves of banks held at the Federal Reserve (the basic ingredient in lending) have risen to record high levels, rising from $13 billion in 2007 to $2 trillion dollars, earning just 0.25 percent interest. Since the mid-2000s, the share of C&I loans going to small firms has steadily decreased in spite of lower interest rates on loans, as shown in Figure 2. In 2012, the share going to small firms fell to one of the lowest levels on record, as shown in Figure 3. (5)

Loan growth is impacted by both the supply and the demand for credit. In the wake of the financial crisis, Washington policymakers appeared to place greater weight on supply constraints as the cause of fewer credit transactions, officially expressing the view that banks had become too, risk averse and excessively reluctant to lend, creating a major impediment to recovery. Undoubtedly, some banks did become more risk averse. Certainly mortgage credit became more difficult to obtain 'compared with the pre-2007 housing boom because traditional underwriting standards were restored. Some banks, especially the "Too Big to Fail" (TBTF) banks, did restrict lending to small firms as their capital became impaired.

But on Main Street, there was less evidence of a restriction in credit supply to small businesses (higher lending standards). Loan interest rates fell dramatically, hardly a restrictive policy. As was the case before the crisis, loan committees continued to "know a good loan when they see one," but simply saw far fewer applicants that were truly creditworthy (those that had good sales prospects). This observation is supported by the monthly surveys (started in 1973) of the approximately 350,000 member firms of the NFIR. (6) As shown in Figure 4, even during the so-called credit crunch period, when asked what the "most important problem" facing their business was, no more than 5 percent of small business owners cited "Finance and Interest Rates" as their top problem. Postcrisis, this measure reached a record low of 1 percent in December 2012. In contrast, this measure went as high as 37 percent in 1982 during the Volcker era of high inflation and Federal Reserve-induced double-digit interest rates and credit restriction. Clearly, owners are willing to identify credit supply constraints when they occur as in the 1979-84 period. However, it is not possible to identify the so-called credit crunch on Main Street following the most recent financial crisis, despite what popular financial media headlines might have read. (7)

The NFIB data provide considerable insight to the recent weakness in small business' weak loan demand, especially among qualified borrowers. The sources of this phenomenon are fairly clear. The small business sector had to re-size from the over expansion that occurred during the housing boom, during which too many strip malls, restaurants, and retailers (as well as construction firms) were created. When the recession hit, these firms struggled to survive a severe contraction in consumer spending by competing for shares of a shrinking pie. The collapse in consumer spending beginning in late 2008 coincided with the increase in the savings rate from around 1 to 6 percent. Each percentage point increase in the saving rate represents a reduction of approximately $100 billion in consumption spending. In 2008 and 2009, about a million small firms were lost, well above the normal rate of attrition, as seen in Figure 5. Many of them sought loans to help them survive, and the composition of loan demand shifted in favor of lines of credit from longer-term loans typically used to finance expansion. (8)

2. The Impact of the Business Outlook on Inventory Management and Expansion Plans

The small firms that were forced to re-size were filled with inventories that were planned to satisfy the demands of consumers who were spending 99 percent of every after-tax dollar of income. With the collapse of consumer spending, these inventories had to be liquidated to raise cash for survival, as shown in Figure 6. The need to liquidate stocks precipitated a binge of price cutting (Figure 7) and reduced the demand for new inventories (Figure 8) and the borrowing that supported it. Just as the stock of housing had to be adjusted to fit the reality of demand conditions, so the number of firms had to be right-sized, along with the stock of inventories. All these assets were not lost to society, but these resources needed to be re-priced and used in other entrepreneurial experiments. It has taken years to get the task done. In the process, huge amounts of labor and capital assets became unemployed and were re-priced and re-located when possible.

The demand for loans to support growth (rather than survival) has remained depressed through the entirety of the economic recovery beginning in July 2009, as actual and planned capital spending declined sharply, as shown by Figure 9. The net percent of owners expecting business conditions to be better in six months (than at the time of the survey) has reached levels comparable with the record low readings reached in late 1979 and early 1980 when GDP plunged at an 8 percent annual rate, as seen in Figure 10. More owners expect their real levels of business sales to be lower in the next three months than expect higher. For these owners, there is no need to borrow to support growth when contraction is expected. Figure 11 shows that the percent of owners viewing the current period as a good time to expand substantially has held at recession levels throughout the entire recovery. With such pessimistic views about the future of the economy, few owners are ready to invest and consequently have little need to seek a loan or put their own money at risk.

3. Evaluation of the Postcrisis Small Business Lending Policy Responses

Once the financial crises started. Washington policymakers focused on attempts to ensure that the supply side of the credit channel was not constrained by increased risk aversion or a lack of available funds. To this end, in addition to strong encouragement to banks to continue lending to creditworthy borrowers, policymakers also implemented a number of temporary programs whose objectives were, at least partially, to ensure the availability of funds for small business lending. These programs include the Term Asset-Backed Securities Loan Facility (TALF) and the Small Business Lending Fund (SBLF).

TALF was conceived as a Federal Reserve policy tool that would help credit market participants meet the credit needs of households and small businesses by "supporting the issuance of asset-backed securities (ABS) collateralized by loans of various types to consumers and businesses of all sizes." (9) The program, originally announced in November 2008, consisted of the issuance of nonrecourse loans by the Federal Reserve to holders of eligible ABS. The loans were intended to increase the use of ABS by providing existing holders of ABS with additional funds for investment purchases, thereby increasing demand for consumer and business credit (including small business loans), auto loans, student loans, and credit card loans--the debt instruments used to construct ABS. To protect taxpayers, the loans were fully collateralized by the ABS purchased by TALF borrowers. In total, just over $71 billion in loans were made through TALE a small sum compared with the more than $2.6 trillion in new securitized assets issued annually on a regular basis before the crisis. The amount of TALF loans that went toward the purchase of ABS backed by loans officially classified as small business loans was even smaller: just $2.2 billion, all of it backed by SBA loans. (10) This is a tiny sum compared with the amount of outstanding C&I loans going to small firms and invites skepticism regarding narratives that TALF played an important role in improving key channels of credit for small businesses. (11)

The SBLF was originally established with the passage of H.R. 5297, the Small Business Jobs Act of 2010, which authorized Treasury to establish a $30 billion fund to encourage community banks with less than $10 billion in assets to increase lending to small businesses. The intended credit-facilitating mechanism employed by the SBLF took the form of capital investments into eligible banks with the capital investments capped at a percentage of banks' risk-weighted assets, the percentage varying with the amount of a bank's total assets. It was policymakers' opinions that through these capital investments, banks would have access to additional funds to lend to small businesses that they otherwise would not have, thereby increasing the number of transactions occurring in the small business credit market and providing small firms with the funds they needed to survive the recession and possibly even grow. H.R. 5927 was signed into law in September 2010 and eligible lending institutions had between then and the application deadlines for SBLF funds, which ranged from May to June of 2011, to apply for capital investments.

An important aspect of the SBLF is that it was "established as separate and distinct from the Troubled Asset Relief Program [TARP] established by the Emergency Economic Stabilization Act of 2008212 The legislation was crafted this way to appease concerns among banks that if the lending fund was not established distinct and separate from TARP, that participation in the SBLF might stigmatize banks as being undercapitalized and expose them to requirements imposed on institutions that take TARP funding, including limits on executive compensation, the issuing of warrants to the federal government, and additional paperwork requirements associated with new financial reporting requirements.

With three years of hindsight, an assessment of the effectiveness of the SBLF as a means for stimulating additional small business lending by banks is now possible. Data collected on the lending behavior of recipients of SBLF funds indicate that as a policy tool intended to increase small business lending, the SBLF fell well short of its intended goals. In total, Treasury approved just over $4 billion in SBLF financing to 332 lending institutions, little more than 13 percent of the $30 billion made available to community banks and approximately twice as much as the $2.2 billion in official small business lending made under TALF. Further scrutiny of SBLF loans made indicate that this $4 billion figure dramatically overstates the share of loans that was in turn lent out by recipient banks to small firms. In what can only be considered to be a perverse outcome, $2.7 billion of the SBLF capital investments went to TARP banks which used $2.1 billion of the SBLF funds to exit TARP, leaving just $1.9 billion in SBLF loans that actually went toward small business lending [Special Inspector General for the Troubled Asset Relief Program 20131.

Whether or not SBLF loan recipients were TARP participants appears to be a distinguishing characteristic between the most successful lenders of SBLF funds and the least successful. According to the TARP Special Inspector General's report on the SBLF:
 [F]ormer TARP banks in SBLF have not effectively increased
 small-business lending and are significantly underperforming compared
 to non-TARP banks. Twenty-four former TARP banks have not increased
 their lending. The remaining former TARP banks have increased lending
 by $1.13 for each SBLF dollar they received. By comparison, batiks
 that did not participate in TARP but received SBLF funding have
 increased small-business lending by more than three times that
 amount--$3.45 for each $1 in SBLF funds.


The low take-up rate of SBLF funds by community banks and the anemic level of actual small business lending that occurred supports the narrative of a small business credit market that, in a postfinancial-crisis recession, simply did not have much demand for credit. Although interested observers concerned about the health of the small business sector and job creation should hope for robust levels of lending to creditworthy small firms, the experiences of both the TALF and the SBLF reinforce the underlying fact that one cannot force more credit transactions to occur when the demand component simply is not there, regardless of how you manipulate credit supply.

More broadly, the Federal Reserve undertook a program of large-scale asset purchases (QE) designed to keep longer term lending rates low and increase liquidity in the hope that the low rates would lead to more risk taking in the private sector. These operations all start in New York with the idea that the impact will "trickle out" to the rest of the economy. As can be seen in Figure 2 (above), although QE drove the yield on the one-year Treasury note to nearly zero, the interest rate on one-year money for small business owners has not dropped below 5.5 percent.

4. Monetary Policy Lags and the Small Business Sector

It appears to take some time for what happens on Wall Street to impact what happens on Main Street. As many small businesses rarely or never use debt from depository institutions to finance their operations, changes in interest rates or credit rationing are unlikely to have a significant immediate effect on their operations. But as previous research has shown, small business owners do absorb information communicated through highly publicized changes in Federal Reserve policy, information that has an immediate impact on owners' expectation of future business conditions which are translated into adjusted spending and hiring plans. With a lag, these plans are then translated into actual hiring and spending [Dunkelberg and Scott 20091.

Additional evidence supporting the lagged transmission between monetary policy and its impact on the small business sector is provided below in the relationship between NEB credit data and measures of credit tightness published by the Federal Reserve. In addition to the aforementioned reasons, the transmission lag is also possibly a reflection of the "character" approach of lending that is frequently employed by small banks toward their small business customers. And despite the fact that many small firms do not borrow from depository institutions, a fraction of them do and are impacted by changes in monetary policy, with those firms borrowing from large banks being more likely to see shorter lags between changes in monetary policy and their experience with credit availability. Since 1973: Q4, NFIB has asked a series of questions related to credit access as well as credit costs:

(A) If you borrow regularly (at least once every three months) as part of your business activity, how does the rate of interest payable on your most recent loan compare with that paid three months ago?

(B) Are these loans easier or harder to get than they were three months ago?

(C) Do you expect to find it easier or harder to obtain your required financing during the next three months?

(D) If you borrowed within the last three months for business purposes and the loan maturity was one year or less, what interest rate did you pay?

(E) During the last three months was your firm able to satisfy its borrowing needs?

(F) What is the single most important problem facing your business today? [Ten choices including "Financing and Interest Rates"] (13)

The Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices provides reports from high-level executives of the largest banks regarding their lending standards and should be a proxy for changes in loan availability. The NFIB survey provides reports from the intended targets of policy, small business owners. Figure 12 shows the responses to Question F above through the 1980-82 credit crisis and the most recent crisis. Recapping Figure 4, Financing and Interest Rates received the most votes for the #1 problem in 1982 (37 percent) but no more than 5 percent throughout the entire credit crisis starting in 2007. Owners can choose only one most important problem and fewer chose Poor Sales in 1982 (23 percent) than in 2008 by 10 percentage points, even though both periods experienced large declines in GDP. But if credit supply were a significant problem, surely the percent of owners selecting Finance and Interest Rates as their top problem would not come in LAST as in fact it did in 2012 (interest rates were much higher in the early 1980s as was inflation; real after-tax rates were negative). The spike in inflation concerns (based on a surge in energy prices) in the first quarter of 2008 was quickly reversed by the collapse of the economy in the fourth quarter.

One measure of credit demand is the percent of owners reporting borrowing activity in each quarter. Regular borrowing activity declined steadily during the recession and recovery to 40-year record low levels. However, Figure 13 shows that the percent of those regular borrowers reporting loans "harder to get" remained historically high for a longer period of time than in the 1980-82 period during which the record high percent of borrowers reporting loans harder to get was set. In the early 1980s, the Federal Reserve was clearly restricting credit availability as a matter of policy. In the most recent recession, the Federal Reserve pursued a policy that would support credit availability. Mortgage credit aside (it has clearly become harder to get, appropriately so), it appears that banks have plenty of money to lend: but potential customers, at least small businesses, were and still are reluctant to borrow. Larger firms seem to have found a reason to borrow more frequently, restoring their C&I borrowing to prerecession levels.

An alternative measure of financial stress may be the percent of regular borrowers reporting credit harder to get weighted by the percent of firms borrowing regularly. A high percentage of regular borrowers reporting difficulty may not be serious if few firms are borrowing regularly. Figure 14 shows the sum of the percentage of owners borrowing on a regular basis (as a proxy for needed credit) plus the percentage of those owners reporting credit harder to get. The results suggest that the 1980-82 period was one in which far more owners who wanted regular credit market access faced increased borrowing difficulty than in the Great Recession. The structure of borrowing agreements may have changed in 30 years, reducing the number of regular borrowers, overstating the differences between the two periods, but the result makes sense as the Federal Reserve was clearly tightening in the early 1980s but was "pushing on the credit string" this time around.

Another measure available is the percent of owners reporting on the satisfaction of their credit needs (available only since 1993:Q2). The percent reporting that they did not want to borrow (or not answering the question) is a proxy for credit demand. When asked if all their credit needs were met in recent months, as many as 53 percent have reported no interest in a loan, as shown in Figure 15, as high as 67 percent if those not answering the question are assumed to have no interest in borrowing. Around 30 percent reported all credit needs satisfied, and just 6 percent complained that all their credit needs were not met (the lowest ever recorded was 4 percent in 2000). It is quite clear that credit demand fell off in the recession and has not recovered.

The percent of owners reporting loans harder to get and the net percent of owners reporting all their credit needs met can be correlated with the Federal Reserve Loan Officer Survey findings (which reports the net percent of loan officers reporting tougher lending standards to small firms) to see what impact alleged changes in credit standards have on customers' views about the ease of getting a loan. It appears that the reports of money center loan officers are highly correlated with small business owner complaints about credit availability, but with a lag, as shown in Figure 16.

The data permit a crude attempt to measure lags in monetary policy, at least from the time money center banks actually react to a change in Federal Reserve policy until it shows up on Main Street as changes in the ease of getting, a loan (money center banks may also be responding to changes in economic conditions independent of any change in Federal Reserve policy). Each of the NFIB measures is regressed against current and lagged values of the Federal Reserve survey measure:

Regression 1: (Figure 17)

% Owners Reporting Loans Harder to Get = [b.sub.o] + [b.sub.1]*Net % Loan Officers Tightening.

Regression 2: (Figure 18)

Net % Owners Reporting All Credit Needs Met = [b.sub.o] + [b.sub.1]*Net % Loan Officers Tightening.

Figures 17 and 18 report the [R.sup.2] statistic and the coefficient of response for up to 12 quarters. The regression findings are consistent with the view that there is a substantial delay between monetary policy changes and their impact on the small business sector. The results suggest that it takes about four quarters for the impact of changes in lending standards by Wall Street banks to peak in terms of reaching Main Street loan customers. The NFIB question has a three-month look back, so it captures complaints for the trailing three months to the survey date. Loan searching is not a daily activity, and this may explain in part why the peak effect takes some time to occur. The regression suggests that for each percentage point of tightening reported by the money center banks, the percent of owners reporting loans harder to get or all credit needs met is altered by a tenth of a percentage point. The standard "deviation of the Federal Reserve Loan Officer's report is 20 percentage points, so a normal change in this indicator would change reports of difficulties in getting a loan or in credit needs met by about 2 percentage points. Compared with standard deviations of 3 and 5 percentage points respectively for reports of loans harder to get and all credit needs met, the effect is substantial, but clearly occurs with a lag. The persistence of the lagged effects of monetary policy differs between the two regressions, with immediately decreasing after peaking in quarter 4 in the regression of the percentage of owners reporting loans harder to get. In contrast, the peak [R.sup.2] values in the regression of the net percent of owners reporting all credit needs met persist for an additional four quarters after peaking in quarter 5.

5. Concluding Remarks

Overall, the NFIB data suggest that the explanation for slow loan growth in the small business sector is not primarily a result of supply constraints on credit, but rather deficient demand, a result of the tepid recovery from the recession and the failure of economic policy to spur a more vital recovery or convince business owners that the policies are correct. Since, the financial collapse, overall C&I lending has grown, as large firms have prospered (corporate profits reached a record share of GDP) and borrowed. At the same time, loans to small firms have declined both as a share of total C&I loan volume and in absolute level.

This disparity in business lending is a reflection of a bifurcated economy with larger firms, directly or indirectly involved in global trade, doing well, while the small business sector has languished (with consumer spending). This bifurcation explains the mediocre growth of the combined economy and the poor record of job creation experienced during the current recovery (small businesses are labor intensive and were responsible for many of the 8 million jobs lost during the recession).

The Federal Reserve has provided more than enough material to support loan growth, whether it be in the form of extraordinary temporary lending facilities like the TALF and the SBLF, or traditional open market operations and large-scale asset purchases (QE) which have pushed down both short-and long-term interest rates in an attempt to induce more borrowing activity. However, the inability of government actions to successfully deal with our economic problems thus far, combined with the promulgation of new laws and regulations largely viewed to he very expensive, have reduced expected returns for small business owners on investing in their businesses, leading instead to record low percentages of owners who think the current period is a good time to expand their businesses, order new inventory stocks or hire new workers. Until these dynamics change, loan demand among small firms will remain weak and there is not much that the Federal Reserve can do to encourage more borrowing.

Caption: Figure 1. Small Business Borrowing

Caption: Sources: FDIC, Statistics on Depository Institutions

Caption: Figure 2. Average Rate Paid on Short-Term Loans

Caption: Figure 3. Small Business Share of C & I Loans

Caption: Source: FDIC, Statistics on Depository Institutions

Caption: Figure 4. Single Most Important Problem Facing Owners: Finance and Interest Rates

Caption: Figure 5. Births and Deaths (Quarterly)

Caption: Source: hrtp://www.b1s.gov/news.releaseicewbd.t08.htm

Caption: Figure 6. Actual Change in Inventory (%increasing--% Reducing)

Caption: Figure 7. Actual Price Increases (Seasonally adjusted)

Caption: Figure 8. Inventory Investment Plans (% plan increase-% plan decrease)

Caption: Figure 9. Planned Capital Outlays (next six months)

Caption: Figure 10. Expectations for General Business Conditions in Six Months (PCT "better"-PCT "worse")

Caption: Figure 11. Outlook for Business Expansion (PCT now is a good time")

Caption: Figure 12. Single Most Important Problem Facing Owners

Caption: Figure 13. Percentage of Regular Borrowers Reporting Loans Harder to Get

Caption: Figure 14. Small Business Credit Problems (Sum of % regular borrowing +% of those reporting loans harder to get)

Caption: Figure 15. Loan Demands Weaken Through the Recession

Caption: Figure 16. Credit Market Tightness: Federal Reserve vs. NFIB

Caption: Figure 17. Loans Harder to Get vs. Federal Reserve Loan Officer Survey

Caption: Figure 18. Credit Needs Met vs. Federal Reserve Loan Officer Survey

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): 229-130.

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 Freetes." 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.

(1.) 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 oil 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 Bemanke 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.

(2.) 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/advoistais/sblaq.pdf.

(3.) 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.

(4.) 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].

(5.) No data available prior to 1995.

(6.) The monthly NFIB Small Business Economic Trends survey data are publicly available at http://www.ntib.com/research-roundation/surveys/small-business-economic-trends.

(7.) 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.

(8.) New firm starts declined from the 2007 level by 220,000 as well.

(9.) A description of the Term Asset-Backed Securities Loan Facility may be found at http://www.federalreserve.gov/monetarypolicy/talf.htm.

(10.) 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.

(11.) 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.

(12.) H.R. 5197, the Small Business Lending Fund Act of 2010. Sec. III. Assurances.

(13.) 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."

* 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 MSc. 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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Comment:Small business borrowing and the bifurcated economy: why quantitative easing has been ineffective for small business.
Author:Chow, Michael J.; Dunkelberg, William C.
Publication:Business Economics
Date:Oct 1, 2013
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