As long as borrowers’ qualifications are prudently reviewed, banks should move forward with lending to creditworthy small businesses, according to a statement issued by the Federal Reserve and other regulators today in an apparent response to growing concerns from the Obama Administration that lending has dried up.
Some small businesses are experiencing difficulty in obtaining or renewing credit, the regulators said.
The decline in lending is attributable to “weakness in the broader economy, decreasing loan demand, and higher levels of credit risk and delinquency,” they said. These factors have caused lenders to tighten their underwriting standards and take actions to meet future credit demands, such as preserving capital.
But the regulators said that lenders may have overreacted.
“While the regulators believe that many of these responses by financial institutions are prudent in light of current economic conditions … experience suggests that financial institutions may at times react to a significant economic downturn by becoming overly cautious with respect to small business lending,” the joint statement said.
In their statement, titled “Meeting the Credit Needs of Creditworthy Small Business Borrowers,” the regulators added that lenders engaging in prudent practices “will not be subject to criticism for loans made on that basis.”
“Regulators … are working through outreach and communication with the industry and supervisory staff to ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound small business borrowers,” the joint statement said.
This week, President Obama formally launched his proposal to re-direct $30 billion in bailout funds into community banks to bolster small business lending. Obama is also proposing a larger budget for the Small Business Administration’s loan guarantees and billions in tax incentives tied to job creation as part of his $3.8 trillion budget sent to Congress for fiscal 2011.
