By SEWELL CHAN, New York Times
WASHINGTON — The chairman of the Federal Reserve urged banks and regulators on Monday to help the nation’s small businesses get the loans they needed to create jobs.
He also acknowledged that economists could not agree on why such lending has contracted substantially over the last two years.
Small businesses — those having fewer than 500 employees — employ half of all Americans and account for about 60 percent of gross job creation. Federal data indicate that lending to such companies fell to below $670 billion in the first quarter of this year from more than $710 billion in the second quarter of 2008.
The reasons are unclear. Many entrepreneurs say that bank loan officers are denying loans to creditworthy borrowers as part of an overreaction to the bad loans of the last economic expansion and heightened scrutiny by regulators.
But several economists paint a more nuanced picture, arguing that weak economic fundamentals and battered balance sheets have lowered the appetite for new lending. They say that demand could take years to recover.
The Fed chairman, Ben S. Bernanke, acknowledged the uncertainty at the start of a daylong forum on small-business lending at the central bank’s headquarters.
“How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability?” Mr. Bernanke asked. “No doubt all three factors have played a role.”
In a broad outreach effort, the Fed held 43 meetings on the financing needs of small businesses, starting on Feb. 3 in Lexington, Ky., and ending on June 30 in Shreveport, La. Two of the meetings, in Miami and Davenport, Iowa, focused on Hispanic-owned businesses. One, in Denver, was centered on the Small Business Administration’s guaranteed-loan programs. At yet another, in Detroit, the challenges facing auto industry suppliers took center stage.
A collapse in the value of real estate and other collateral used to secure loans posed a “particularly severe challenge” to small businesses, Mr. Bernanke said. He recalled that a business owner at the Detroit meeting told him, “If you thought housing had declined in value, take a look at what equipment is worth.”
Some entrepreneurs have resorted to borrowing on their personal credit cards or from their retirement accounts, he noted.
Banks, for their part, say that they have not so much tightened credit as returned to more traditional underwriting standards after being too lax, Mr. Bernanke acknowledged.
“But, though some lenders said they were emphasizing cash flow and relying less on collateral values in evaluating creditworthiness,” Mr. Bernanke said, “it seems clear that some creditworthy businesses — including some whose collateral has lost value but whose cash flows remain strong — have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating.”
Mr. Bernanke’s cautious diagnosis set the tone for the forum, which included four panel discussions. His view was echoed by two other speakers, Karen G. Mills, the head of the Small Business Administration, and Elizabeth A. Duke, a member of the Fed’s board of governors.
But the ambivalent nature of the discussion — after months of listening and research by the Fed — prompted expressions of frustration from several of those invited to the event.
“With all due respect for my banking colleagues, there is an apparent disconnect between the proclaimed ‘business as usual’ and the widespread problems with access to credit reported by small businesses,” said Shari Berenbach, president of the Calvert Foundation, a nonprofit organization in Bethesda, Md., that makes loans to community development financial institutions that serve poor and working-class areas. Bank representatives maintained that meritorious borrowers were getting loans, and economists agreed that there was not much evidence of a broad refusal to lend.
Kevin P. Watters, chief executive of business banking at JPMorgan Chase, said the bank was taking a second look at borrowers that initially were denied loans, and was eager to make loans. “We’re really trying to get those healthy borrowers to invest again,” he said.
William C. Dunkelberg, an economist in the School of Business and Management at Temple University, said surveys showed that capital spending was at a 35-year low and that companies were still cutting, not adding, inventory. “Credit’s not an issue,” he said. “Customers are the issue.”
Even so, Mr. Bernanke’s remarks suggested that the Fed was not sure why lending had contracted. He highlighted the particular importance of start-up businesses. Companies less than two years old accounted for roughly a quarter of gross job creation over the last 20 years, even though they employed less than 10 percent of the work force during that time, he said, citing new research.
Zoltan J. Acs, an economist in the School of Public Policy at George Mason University, said that in Japan stagnation had stifled entrepreneurship, and that the United States might be following a similar path.
“What I worry about is, are we on a trajectory where start-ups are not going to recover?”