Posted by: John Tozzi on March 1, 2010
Reuters’ Felix Salmon raises a good question at the end of a post about whether governments can actually sway banks to lend more. He writes:
[W]hen the government guarantees loans, for instance through the Small Business Administration, that might do more to help increase lending — but only by transferring credit risk out of the banking sector and onto the taxpayer. And it might in fact just move lending activity into the small-business area from elsewhere in the bank, without increasing the total amount of credit that the bank makes available. It would be great to see some empirical studies on such matters.
Do banks take money they would lend anyway and channel it through SBA programs to reduce their risk through guarantees? SBA-guaranteed loans have interest rates capped (details here), and bankers I’ve interviewed generally don’t regard SBA lending as particularly profitable. The loans take more time to underwrite (because of the documentation needed for the guarantee) for relatively small-dollar amounts. But Salmon’s question is interesting. Can any loan officers or others reading shed some light?