Getting loans flowing more normally to creditworthy small businesses will help the economic recovery, Federal Reserve Ben Bernanke said Thursday.
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 credit clogs have hurt hiring.
Lending to small businesses is declining even though the economy is improving. Lending has dropped from almost $700 billion in the second quarter of 2008, a period when the country was embroiled in a financial crisis, to $660 billion in the first quarter of this year, Bernanke said in prepared remarks in Detroit. Many lawmakers on Capitol Hill have complained about small businesses wanting to take out loans but having trouble getting them.
Bernanke, however, said it's difficult to divine whether the decline in lending to small businesses was being driven more by weaker demand or reduced supply because loans are harder to get. Lenders and borrowers have different perspectives the problem, he said.
"For example, some potential borrowers have been turned down because lending terms and conditions remain tighter than before the financial crisis, perhaps reflecting banks' concerns about the effects of the recession on borrowers' economic prospects and balance sheets," Bernanke said.
"From the potential borrowers' point of view, particularly a borrower who has been able to obtain loans in the past, these changes may feel like a reduction in the supply of credit," he added. "From the lender's point of view, the problem appears to be a lack of demand from creditworthy borrowers," he said.
Getting bank lending flowing more normally again 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.
The Fed has been reaching out to small businesses in an effort to come up with ways to help ease the credit problem. Bernanke's meeting in Detroit was one of a series of such sessions the Fed has been conducting. The findings from the meetings will be presented in a conference at the Fed in the summer.
Bernanke didn't talk about the future course of interest rates.
The Fed has pledged to hold rates at record lows near zero to support the recovery. It meets next on June 22-23.
Bernanke did observe that the country in now in an "economic expansion, with jobs once more being created rather than destroyed."
However, he said persistently high unemployment, now at 9.9 percent, is a "difficult issue" that imposes "heavy costs on workers and their families as well as society as a whole."
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