Bank Lending: Still Held Back By Bad Assets

Posted by: John Tozzi on August 14, 2009

Today we feature a story from the new issue of BW Small Biz magazine about how banks are still reluctant to make loans to small businesses. BW’s Jeremy Quittner reports:

The $787 billion stimulus package has funneled unprecedented amounts of money into the nation’s financial system, but business owners like Barnes say the impact on entrepreneurs has been minimal. A June survey by the National Federation of Independent Business found that the percentage of business owners who found loans harder to get was near historic highs. Despite programs designed specifically for them by the Small Business Administration, many small business owners say banks just won’t lend. And many bankers themselves concede they are seeking only the best credit risks. “Banks are fighting over the most creditworthy [small businesses],” Martha Seidenwand, SBA program operations manager for KeyBank in Cleveland, said in May.

One clue to what’s going on lies in lingering problems on bank balance sheets, according to a report by TARP watchdog Elizabeth Warren. She argues that banks are holding back because of the accounting rule change that lets them value their toxic assets — the mortgage loans and related securities that sparked the financial crisis last fall — higher than what the market would pay if they had to sell them today.

BW’s Theo Francis breaks it down in a post on Warren’s report:

Meantime, the toxic loans also make banks less inclined to lend: Whatever the value on the financial statements, banks know they’ll ultimately have to recognize deterioration in the loans value once loan payments fail to come in — from unemployed homeowners, cash-strapped developers, struggling small businesses. So they have every incentive to hoard the capital they have instead of lending it.

“Regardless of how they carry the loans on their books, banks have some sense of whether they are facing a lot of losses next year or the year after,” Warren says. “They try to hold on to [capital] against that day in the future when they’re likely to take serious losses on those loans.”

The problem is most acute among “smaller” banks — meaning those banks smaller than the 19 behemoths that put themselves through government-supervised “stress tests.” These banks do a lot of small-business lending, and are also more likely to hold whole loans than the securitized loans that the big banks liked.

As a result, Warren says, “if the smaller financial institutions remain at risk because of their toxic assets, it has implications not only for the stability of the financial system but also for the economy in restarting lending.”

We’re fully 11 months out from the collapse of Lehman Brothers, and more than a trillion dollars deep in government guarantees, loans, and investments intended to fix the financial system. That all may have been necessary to avert a depression. But the basic problem it was intended to fix — banks seized up over bad mortgage loans — nearly a year ago remains.

Reader Comments

KKIM

August 17, 2009 3:30 PM

This article proves what my comapany and I have been saying for years. Banks lend money to those ( small businesses) that are most creditworthy. Those businesses that are low risk. How do you ask do you get your business creditworthy? That's simple you develop business credit. Get your business its own credit profile to lessen the use of your own personal credit. Let me know and I will get some information out to you on how to get this done.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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