Bailout Missed Main Street, New Report Says

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The Wall Street Journal
By: Emily Maltby
May 14, 2010

Loans to Small Businesses Dropped at Double the Overall Rate, Claims Watchdog Group; 'Lending Is Not Springing Back'

Government funding to U.S. banks has done little to ease the credit crunch for small businesses--and the situation doesn't seem to be improving, according to a new report.
The value of large banks' loans to small businesses shrank 9% between 2008 and 2009, more than double the 4.1% drop for overall lending, said a report released Thursday by the Congressional Oversight Panel, a group set up to oversee funds allocated by the federal government's Troubled Asset Relief Program.

"Big banks pulled back on everyone, but they pulled back harder on small businesses," said Elizabeth Warren, chairwoman of the oversight panel, in a discussion with reporters.

The U.S. Treasury Department's TARP programs, launched during the depths of the financial meltdown, didn't improve access to credit, the report claims.

"Treasury never required banks to lend their new money," said Ms. Warren.

The squeeze on small-business credit "has been and remains a serious economic challenge," said Gene Sperling, counselor to Treasury Secretary Timothy Geithner, in an interview. "There's also little question that the crisis, the economy and small business lending would have been far worse without the swift and significant financial rescue efforts."

Based on the Treasury's own research, smaller banks that took capital from the rescue efforts showed stronger small-business lending than comparable small banks that did not, Mr. Sperling said.

The oversight panel didn't include this data in its report, but said that small-business lending values at the smallest banks fell by about 2.7%, compared with a 0.2% decline in their overall lending.

The oversight committee's report said it's unclear whether lending has been constricted more by a lack of lenders or a lack of borrowers. Businesses cautious about piling on additional debt in the recession have been reluctant to seek loans from banks, the report explained. Meanwhile, underwriting standards at banks have tightened so much that small businesses, which are considered to be riskier investments, can't squeeze through.

"Banks are lending less and less. What we hoped was 2009 was a trough, but lending is not springing back," Ms. Warren said.

Business owner Kathleen Ameche, chief executive of Ameche Group LLC, which sells a line of items called MicciMicci for women travelers, says she hasn't been able to secure the $250,000 to $500,000 she needs to meet growing demand for her products.

Ms. Ameche says she has courted several lenders in recent months and will make a push to request credit in coming weeks. "It's a delicate balance" for the banks, she said. "They are gun-shy because they don't want to make a wrong turn and be in a position like they were before."

Some of the banks' hesitation may stem from increased oversight from federal regulators, according to the panel's report. Despite overall bank weakness, there are some "banks that state that they are able, willing, and eager to increase lending but that the current regulatory climate makes this extremely difficult," the report notes, adding that there are more than 700 banks on the Federal Deposit Insurance Corp.'s "watch list" of institutions in danger of failing.

President Barack Obama and the Treasury have proposed several government solutions to get loans to Main Street. But according to the report, few have had success and none have had a significant impact.

The report highlighted programs that aimed to jumpstart the secondary markets for securities related to small business loans, but too few of those securities are actually sold on the secondary market for there to be any meaningful effect.

Also, last year's stimulus included a provision to increase the guarantee of loans backed by the Small Business Administration. While that program has been attractive to lenders and has seen a substantial increase in loans in the last year, the report says that only 4% of outstanding small-business loans are guaranteed through the SBA's flagship lending program.

As small businesses continue to be blocked off from credit access, other segments appear to be having better luck. "Large businesses are borrowing more than small businesses," said Ms. Warren. "We run the risk of tilting the playing field in favor of large businesses and away from small businesses. Without theses small businesses, there will be no meaningful economic recovery."

--Meena Thiruvengadam contributed to this article.

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This page contains a single entry by CFED published on May 14, 2010 4:24 PM.

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