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Credit for sound small businesses is crucial to the recovery, the Fed chairman says.
Published Jul. 13, 2010

Associated Press

WASHINGTON - Federal Reserve Chairman Ben Bernanke stepped up pressure Monday to get banks to boost lending to the nation's small businesses, a critical element to spurring the economic recovery and reducing unemployment.

Bernanke and other regulators have urged banks since February to increase their lending to smaller companies. Lawmakers on Capitol Hill have complained that small businesses that want to take out loans are having trouble getting them. Banks have countered by saying demand is weak.

Bernanke's latest comments, at a Fed conference exploring ways to help boost lending to small companies, come as legislative efforts to jump-start small-business lending have languished and the recovery has been losing momentum.

"Making credit accessible to sound small businesses is crucial to our economic recovery," Bernanke said. "More must be done," he said.

While big companies have stockpiled cash and are expected to report strong profits starting this week, small businesses have struggled to secure loans to expand and hire.

The disparity between large and small businesses has been one reason the recovery has not picked up and could even stall. Small businesses, which employ roughly half of all Americans, account for about 60 percent of gross job creation, Bernanke said.

And newer small businesses, those less than 2 years old, are especially important. Over the past 20 years, these startup enterprises accounted for roughly one-quarter of gross job creation, even though they employed less than 10 percent of the work force, he added.

The Obama administration in early May sent Congress a proposal to create a $30 billion support program to unfreeze credit for the nation's small businesses. The fund would provide support to small and medium-sized banks with assets of less than $10 billion to encourage them to increase lending to small businesses. The legislation has yet to pass in the Senate.

Lending to small businesses has declined even as the economy had improved -from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of this year.

The Fed and other regulators have urged banks to step up lending to creditworthy small businesses. Despite the push, such lending is still crimped.

Bernanke said it is hard to tell whether the problem is more reflective of banks shying away from making loans to small businesses or a lack of demand from those companies.

Many small businesses have had to resort to borrowing through their personal credit cards or from their retirement accounts because they couldn't get bank loans.

Getting bank lending flowing more normally is a delicate dance for the Fed and other banking regulators.

As regulators encourage banks to make loans to sound borrowers, they are also working to make sure banks get back on firmer footing after suffering through the worst financial and economic crises since the 1930s.