Meet the Author

Matthew Koepke |

Research Analyst

Matthew Koepke

Matthew Koepke is a former research analyst in the Research Department of the Federal Reserve Bank of Cleveland.

Meet the Author

James B. Thomson |

Author

James B. Thomson

James Thomson is a former vice president and financial economist in the Research Department of the Federal Reserve Bank of Cleveland. He retired in February 2013.

06.27.11

Economic Trends

Small Business Lending Continues to Struggle

Matthew Koepke and James B. Thomson

As the economy continues to grow at an anemic pace, questions remain about the condition of small business lending. The most recent data on conditions are mixed. On one hand, the Federal Reserve Board’s senior loan officer survey on bank lending practices suggests that the lending environment has been improving for small business owners. In the most recent survey, the net percentage of senior loan officers reporting tighter lending standards for C&I loans for small business dropped to −1.9 percent. Moreover, according to the survey, demand increased, with a 5.6 net percentage of senior loan officers reporting increased demand for C&I loans from small businesses, the first time the series has turned positive since June 2006. On the other hand, the most recent data from the FDIC suggests that small business lending by FDIC-insured banks and thrifts remains weak.

Since the beginning of the recession, the level of small business lending has fallen considerably. In the years leading into the recession (2000 to 2008), overall business loan portfolios at FDIC-insured institutions grew on average 7.2 percent per year, and small business loan portfolios (loans under $1 million) grew on average 5.5 percent a year. After the recession, (from 2009 and 2010), overall business loan portfolios have declined 4.0 percent on average, and small business loan portfolios have declined 4.2 percent on average. While total loan portfolios and small business portfolios declined in a similar manner from 2009 and 2010, their performance has been uneven over the past year. From the first quarter of 2010 to the first quarter of 2011, small business loan portfolios have shrunk 8.6 percent while overall business loan portfolios have fallen only 0.9 percent. It is difficult to tell, however, if total loan portfolios will continue to outperform small business loan portfolios going forward. Though they seemed to hit a positive inflection point in the fourth quarter of 2010, since the first quarter of 2011 they have started to decline.

A more granular examination of small business loans held by FDIC-insured banks and thrifts shows that loans to small businesses have been declining across all loan segments. Small business loans peaked in June 2008 at $711 billion. Since then, total holdings of small business loans have declined 14.3 percent through the first quarter of 2011 to just under $610 billion. Moreover, declines have been seen across all size categories. Loans under $100,000 declined 18.1 percent, loans between $100,000 and $250,000 declined 16.7 percent, and loans between $250,000 and $1 million declined 12.1 percent. Not surprisingly, the weakness in small business lending has caused small business loans as a share of total business lending to decline through the first quarter of 2011, to 29.1 percent.

The composition of small business loan portfolios has had a major impact on the balances of small business loans held by FDIC-insured banks and thrifts.Loans between $250,000 and $1 million constitute the largest percentage of the total dollar amount of small business loans at 59.7 percent but are only 4.8 percent of the total volume of small business loans. This distinction is important since from 2000 to 2008 the growth in small business loans held by FDIC-insured institutions was driven by strong growth in the number of loans issued under $100,000. Over the 2000 to 2008 time frame, the volume of small business loans under $100,000 grew 13.9 percent compared to 6.0 percent for loans between $100,000 and $250,000 and 6.8 percent for loans between $250,000 and $1 million. As a result of their influence on loan growth from 2000 to 2008, loans under $100,000 were the primary drivers in the declines in loan balances from 2008 to present.

The shrinkage in small business loan portfolios from 2008 to 2010 can be attributed to a combination of declining loan balances (falling 4.2 percent a year) and a decline in the number of loans (falling 9.1 percent). The largest declines were seen in loans under $100,000, where volumes fell 9.7 percent compared to declines of only 1.2 percent for loans between $250,000 and $1 million and 4.0 percent loans between $100,000 and $250,000. The FDIC’s most recent first-quarter data show that small business loan balances have declined at an annualized rate of 8.6 percent, having fallen $57.1 billion over the year. While loans under $100,000 accounted for the biggest declines in loan balances held by FDIC-insured institutions (falling 14.0 percent), the declines were more likely attributed to smaller average loan balances (falling 8.8 percent) than declines in volumes. Volumes for loans under $100,000 fell only 5.7 percent compared to 6.4 percent for loans between $100,000 and $250,000 and 9.3 percent for loans between $250,000 and $1 million.

While the most recent senior loan officer survey suggests conditions are improving for small business lending, the most recent data from the FDIC shows that small business lending continues to struggle. Until there is an improvement in loan volumes, particularly in loans under $100,000, small business loan balances held by FDIC-insured banks and thrifts are not likely to improve.