Banks are lending, borrowers are struggling
Three quick points relating to this excellent article by the WSJ.
Loans and leases in bank credit stood at $9.1 trillion as of Nov. 2, according to Federal Reserve data. That is up about 25% from early 2013, surpassing a crisis-era peak of nearly $7.3 trillion.
A. Banks have more cash deposits on their balance sheet than ever before. They are clearly pushing to get that money out the door, but federal regulators are criticizing banks that want to grow quickly, afraid that there is another bubble coming.
Yet some bankers say that more reflects capital rules imposed by the Fed and Basel requirements. Other legislation, such as new rules governing credit cards, along with the creation of the Consumer Financial Protection Bureau, also receive blame for hampering lending.
B. GDP has grown slowly over the past few years. If the economy was growing at a faster pace, for example, greater than 5% annually, the total business loan origination would be much smaller percentage of GDP.
Total business loans made by banks topped $2 trillion earlier this year and eclipsed their crisis-era peak in 2014, Fed data show. Such loans were equal to more than 12% of real gross domestic product in the third quarter, their highest level in at least 50 years.
C. Borrowers with less than stellar credit are still having a difficult time borrowing from banks. They are turning to expensive online lenders and other alternatives, often times without checking the fine print. Many online lenders are receiving severe criticism from federal, state and local governments, as well as their peers in the market. Some critics feel that the next credit bubble will come from
Banks and analysts acknowledge that it often is more difficult for smaller businesses or consumers without the best credit to get loans, or secure them at favorable pricing.
It is not clear whether or not the new administration will make any significant regulatory changes, but much has been hinted around significant changes to Dodd-Frank. In any case, there will likely be some commercial credit regulation if signs show an increasing chance of a bubble, or if the online loan community experiences any big failures, like Lehman Brothers.
In any case, we strongly encourage any small businesses contemplating an non-bank small business loan to talk to experts about the risks, the fine print and the company’s readiness to borrow money.
PDX Impact is small business financial technology and advisory firm, primarily assisting under-served businesses, entrepreneurs and nonprofits in the greater Portland area.
