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posted on 05 March 2017

Small-Business Lending Languishes As Community Banking Weakens

from the Dallas Fed

-- this post authored by Kelsey Reichow

Community banks are key providers of loans to small businesses, which are important contributors to the local economy and international trade. While regulatory burden on small banks and its impact on lending has received attention, it is difficult to isolate the most significant driver of sluggish small-business lending.

merica’s small businesses have struggled securing credit since the end of the financial crisis in 2009. Small-business loans at U.S. commercial banks have declined 15 percent from their precrisis high, while total business loans increased 33 percent (Chart 1).

As a result, small-business loans’ share of total bank loans is down 13 percentage points. The trend extends beyond the crisis, as small-business loans - those with original amounts of less than $1 million - have shrunk from almost 40 percent of the overall business loan portfolio in 2004 to 20 percent in 2016.

This is particularly worrisome because small businesses, defined as those with fewer than 50 employees, are significant job creators. Small businesses employ about 120 million people, roughly half of the nation’s private-sector workforce. New firms in particular - almost all of which are small - are responsible for a majority of total net job creation. Moreover, the Federal Reserve Bank of Cleveland’s 2015 Small Business Credit Survey found that 95 percent of all firms employed fewer than 50 people.

A less-heralded role small business fills is that of driving innovation. Relative to larger enterprises, small business develops more patents per employee, with the smallest firms (fewer than 25 A Small-Business Lending Languishes as Community Banking Weakens by Kelsey Reichow employees) producing the greatest number per employee. More broadly, small businesses contribute significantly to private nonfarm gross domestic product and to international trade, comprising more than 97 percent of exporters and importers and roughly one-third of export and import value.

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Source: research/ eclett/2017/~/ media/ documents/research/eclett/ 2017/ el1703.pdf

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