Banks Still Hobble Small Business And For Good Reason

Douglas A. McIntyre

Many economists believe that small businesses with under 100 employees are still the engine of the economy and the major source of new jobs. The banking system has killed that since the beginning of the credit crisis, but the financial firms can hardly be blamed. The recession has taken its toll on companies which have only a few customers and are struggling to cover costs. They simply are not good credit risks.

The Congressional Oversight Panel’s May oversight report, “The Small Business Credit Crunch and the Impact of the TARP,” finds that, although the Troubled Asset Relief Program (TARP) has launched several initiatives aimed at restoring credit availability, it is not clear that they have had any significant impact on small business lending.

From 2008 to 2009, lending to small businesses fell 9%. Overall lending portfolios only dropped 4.1% according to the report.

The panel attacked Treasury’s plan to offer $30 billion to small and midsized banks to encourage lending. The capital would carry a below average interest rate. COP says that the program will take a long time to approve and may be an administrative mess.

Banks can’t be given incentives to make small business loans. The government will have to force their hands. No financial firm is going to extend credit to companies on which it believe it will make a loss. The FDIC examiners are too close at hand

Douglas A. McIntyre

Douglas A. McIntyre