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 |


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.


Subdued Business Lending

Matthew Koepke and James B. Thomson

The financial crisis and subsequent recession caused bank profitability to decline significantly. Banks responded to the crisis by reducing lending. However, as the economy muddles through the recovery, there are signs that banks’ profitability is improving, potentially creating a more favorable lending environment.

According to the most recent data from the FDIC, since June 2009, the pre-tax return on assets at commercial banks has risen 188 basis points to 1.46 percent, while the return on equity at FDIC-insured commercial banks has risen even more, increasing 1318 basis points from −4.0 percent to 9.1 percent. Furthermore, it appears that the improved bank profitability has translated into a more favorable lending environment for businesses, particularly small businesses. According to the April 2012 Senior Loan Officer Survey, 98.2 percent of senior loan officers reported no change in lending standards for C&I loans or credit lines for businesses with revenues less than $50 million, and 1.8 percent reported an easing in standards. However, despite the improved profitability at banks, small business loan growth at FDIC-insured banks and thrifts continues to be subdued.

After declining precipitously through the recession, small business loan balances (loans under $1 million) at FDIC-insured banks and thrifts have continued to fall through the economic recovery. After growing at an average annual rate of 5.5 percent from 2000 to 2008, small business loan balances have declined steadily to their lowest levels since 2005. Comparatively, total business loan balances have fared better over the same period. Like small business loan balances, total business loan balances declined during the recession and recovery, falling an average of 2.3 percent from June 2009 to June 2011. Unlike small business loan balances, however, total business loan balances have grown for four consecutive quarters, increasing at an average rate of 3.8 percent per quarter from June 2011 to March 2012. It is difficult to tell if small business loan balances have trailed total business loan balances because of weak demand or an inadequate supply of credit. Nonetheless, while the improvement in bank profitability has coincided with an increase in total business loan balances, small business loan balances at FDIC-insured institutions have struggled to grow.

The struggle to grow is apparent across all loan segments. Overall, small business loans peaked in June 2008 at $711 billion. Since then, total holdings of small business loans have declined 17.0 percent through the first quarter of 2012 to $590 billion. Loans in every segment contributed to the total decline: Loans under $100,000 fell 18.5 percent, loans between $100,000 and $250,000 fell 20.9 percent, and loans between $250,000 and $1 million fell 15.3 percent. The continued decline in small business loan portfolios, coupled with the growth in total business loans, has caused the share of small business loan balances in total business loan balances to decrease to 26.7 percent.

Banks and thrifts have changed the composition of their small business loan portfolios. Over the past year, loans under $100,000 grew as a percent of total small business loans in terms of the amount (an increase of 70 basis points) and volume (increase of 110 basis points). Comparatively, the share of loans between $100,000 and $250,000 and $250,000 and $1 million fell both in terms of amount and volume. Over the past year, loans between $100,000 and $250,000 fell 30 basis points to 16.9 percent of the total dollar amount of loans and 50 basis points to 3.9 percent of the total volume of loans. Similarly, loans between $250,000 and $1 million fell 30 basis points to 59.6 percent in terms of the total amount of loans and 60 basis points to 4.2 percent in terms of total volume of loans.

The composition of bank loan portfolios can explain the decline in small business loan balances. From March 2010 to March 2012, total balances for loans under $1 million fell 5.7 percent on average, while volumes for loans under $1 million were flat. Over the last two years, a modest increase in loan volume was seen in loans under $100,000. These smaller loans rose an average 0.3 percent over the last two years and 2.0 percent over the last year. Comparatively, over the same period, volumes fell for loans between $100,000 and $250,000 (falling 5.8 percent) and loans between $250,000 and $1 million (falling 6.5 percent). Over the last year, the decline in balances for loans under $100,000 coupled with an increase in volume has caused the average loan balance under $100,000 to decline 9.6 percent to $6,500. Over the same period, balances and loan volume fell for loans between $100,000 and $250,000 and loans between $250,000 and $1 million, but the declines had different effects on the two loan segments. For loans between $100,000 and $1 million, the average loan balance fell 2.6 percent to $110,000; however, because loan volume fell faster than loan balances for loans between $250,000 and $1 million, the average loan balance for that category actually rose 1.3 percent to $360,000. Overall, the average loan balance for all loans under $1 million fell 11.1 percent to $25,500.