The Massachusetts Bankers Association recently released a study that says community banks in the Bay State increased their small-business lending during the Great Recession – a finding that runs contrary to some beliefs in the business community that banks battened down the hatches.
The study, “Funding Economic Recovery: Trends in Small Business Lending in Massachusetts,” was conducted by PolEcon Research.
Daniel J. Forte, president and CEO of Massachusetts Bankers Association, answered five questions about the study.
PBN: Can you provide some of the significant findings in the study?
FORTE: Community banks in Massachusetts increased their small-business lending throughout the recession, increasing their volume by $467 million (or 5.3 percent) in 2008, $622 million (or 6.7 percent) in 2009, and $120 million (or 1.2 percent) as of Sept. 30, 2010. In comparison, community banks nationally increased small business lending by just 2.8 percent in 2008. Small business lending by community banks declined by 2.4 percent nationally in 2009 and by 4.4 percent in 2010. There was, no doubt, a national credit crunch, but in Massachusetts and much of New England, 95 percent of the slack was picked up by community banks.
A lack of sales continues to be the major contributor to reduced demand for loans among small businesses. Other key factors affecting the volume of small business credit in recent years include: deleveraging by many small businesses after a period of rapidly increased borrowing; recession-induced damages to the balance sheet of many small businesses, producing fewer qualified borrowers; declines in collateral values, often a small-business owner’s home, but also commercial real estate, limiting the ability of borrowers to access credit.
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PBN: What were the biggest surprises in the study?
FORTE: We were very surprised to learn that prior to the recession 13 percent of all borrowing by small businesses was on credit cards, and the credit-card companies reduced their lending by more than 50 percent during the recession. National credit card companies and commercial lenders with few, if any, retail bank branches in Massachusetts accounted for the majority of the reduction in small-business credit in Massachusetts during the recession. When the card companies and national lenders curtailed their lending here because of regulatory pressures and losses in other regions that were in much worse shape than New England, our local banks stepped up to the plate with plenty of money to lend to qualified borrowers. The extent to which community banks filled the gap was also surprising; as is the realization that loan demand is getting better but it is still quite weak. Small-business borrowers still lack confidence.
PBN: That loan demand from small businesses was and is lacking seems to run counter to the statements of many business owners I talk to. Who is correct here?
FORTE: It depends on which business owners you talk to, but the numbers don’t lie. Throughout the recession, and even now while we’re still recovering, businesses have lacked either the sales, the confidence, or both, to initiate borrowing again. Those that have tried to borrow and failed would be loath to admit to the media that their sales may be off or their credit is bad. That’s what happens in a recession and, really, we’re fortunate that these seriously troubled businesses are in the minority here. However, they can be quite vocal. Keep in mind that bank examiners will not let banks lend to help a company make a payroll, or to tide it over until a recession has passed, if the company is really distressed. A bank is in the business of managing risk; lending to increase inventory, to expand, or to spend on marketing is much wiser as long as the company is not greatly impaired.
PBN: How should policy makers use this study? What should they glean from its findings?
FORTE: To the extent that the contraction in small-business lending reflects a shortfall of demand rather than an insufficient supply of credit, most supply-side solutions that seek to influence bank lending will be ineffective. The structure of the small-business credit market locally will require that any policies to address meaningfully the supply of small-business credit must rely on the lending resources and infrastructure of local banks both large and small. Public policies that seek to increase the supply of credit to small businesses by expanding the size or capacity of quasi-public lenders will have only very limited impact on the small business credit market. For example, doubling the size of the loan programs at the quasi-public lenders will increase the total volume of small business credit in the state by no more than one percent. So any incentive programs would be better off directed at local banks.
PBN: Given that the study paints Massachusetts’ community banks as the one group that saved the day here, stepping in when credit card companies and national lenders tightened standards, how would you respond to skeptics who might question the source – the association – for such findings?
FORTE: Although the study was commissioned by the Massachusetts Bankers Association, it was independent research. We had no say whatsoever in the methodology of the study nor its outcome. Keep in mind as well that we represent all of the banks that do business in Massachusetts, large and small, state and national, mutual and stock, and quite a few banks in our surrounding states. We’re pleased with the way that they all have managed their risk before, during, and after the crisis. There was no subprime lending here; no need for bailouts. There was only one bank failure in all of New England. There are no safety and soundness issues here for customers to worry about. Our banks have been not a part of the problem but a good part of the solution. The competition here is great and that’s good for consumers. And, as we emerge from the crisis, data would suggest that all banks, both large and small, local and national, have more than sufficient funds to expand their small business lending in the year ahead.
