Getting loans to flow more normally to small businesses is a critical ingredient to bolstering the economic recovery and reducing unemployment, Federal Reserve Chairman Ben Bernanke said Monday.
Bernanke made the comments in prepared remarks to a Fed conference here exploring ways to help boost lending to small companies — from pizzerias to start up technology firms.
"Making credit accessible to sound small businesses is crucial to our economic recovery," Bernanke said. "More must be done," he pledged.
Small businesses, more so than big companies, rely on bank loans to expand operations and hire. Small businesses usually help drive job creation during recoveries but tight credit has hurt hiring.
They employ roughly half of all Americans and account for about 60 percent of gross job creation, Bernanke said. And newer small businesses, those less than two years old, are especially important.
Over the past 20 years, these start-up enterprises accounted for roughly one-quarter of gross job creation, even though they employed less than 10 percent of the workforce, he added.
Lending to small businesses is declining even though the economy is improving. Lending has dropped from more than $710 billion in the second quarter of 2008, a period when the country was embroiled in a financial crisis, 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 lawmakers on Capitol Hill have complained that small businesses that want to take out loans are having trouble getting them. Some banks say demand is weak.
Business owners frequently say that the declining value of real estate and other collateral securing their loans poses a particularly severe challenge, Bernanke said. Business owners cited credit lines and working capital as their most critical financial needs, followed by refinancing products that would let them take advantage of low interest rates, he added.
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.
Because each company often faces a unique combination of local economic conditions and complex relationships with customers, suppliers and creditors, the Fed, in developing any new policy options, should be "wary of one-size-fits all solutions," Bernanke said.
Lenders, meanwhile, say they are returning to more traditional lending standards, after a period of lax lending that contributed to the financial crisis.
Leaders from small businesses, trade groups, financial institutions among others were slated to participate in Monday's conference. It comes after the Fed has held a series of more than 40 regional meetings this year on the matter.
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.
Bernanke didn't talk about the future course of interest rates or the state of the economy.
The Fed is expected to hold rates at record low, through much of next year and possibly into 2012, to foster the fragile rebound.
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