Small Business Lending to Improve This Year

Small-business lending will likely improve this year, but the degree of growth depends on the overall economic recovery, top U.S. bank regulators said on Thursday.

The Obama administration and federal regulators have both struggled to find ways to get banks to lend more to small businesses, which is viewed as key to getting the stubbornly high unemployment to begin dropping.

Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday they expect the situation to improve in 2011, but added there is a limit to how much the government can do.

"The more we can do to get the economy going again, the more we're going to help small businesses and banks' lending to small businesses," Bair said at a forum on small-business lending hosted by the FDIC.

There are already signs hiring is picking up, including at small businesses, but unemployment remain high. In December, the unemployment rate dropped to 9.4 percent from 9.8 percent.

The ADP National Employment Report released earlier this month showed businesses added 297,000 jobs in December and the smallest companies -- with fewer than 50 workers -- accounted for more than a third of this increase. Economists view the report somewhat skeptically, however, because it has a spotty track record.

Bernanke believes the economy will grow 3 percent to 4 percent this year, which will not be enough to put much of a dent in jobless numbers.

As part of efforts to get the economy going, regulators face the dilemma of pushing banks to lend more, while also urging them to be careful about the amount of risk on their books following the financial crisis of 2007-2009.

Banks and lawmakers complain the right balance is not being struck. They contend lending is being restricted because regulators are sending a mixed message, with agency heads in Washington saying they want more lending while examiners in the field crack the whip on loans they view as not meeting a high enough standard.

"Instead of focusing on patterns and practices that suggest poor underwriting or lax risk management, some examiners are micro-managing the daily activities at our community banks," House Financial Services Chairman Spencer Bachus said at the forum.

Bernanke and Bair have instructed their examiners to be more flexible with lenders, particularly in cases where the bank knows the small business and the business has a good track record of repaying its loans.

They also pushed back on this complaint, arguing banks sometimes use the regulators as an excuse when they do not want to make a loan.

Bernanke said banks need to do more work and consider a variety of factors when determining who should get a loan.

He argued banks are relying too much on the collateral a borrower brings to the table. Many small businesses use their homes or commercial properties for this purpose and with real estate values low they are having a harder time getting a loan.

"Collateral is essentially a way to make a loan without doing much work," Bernanke added.