Thursday, March 08, 2012

Big Banks, Smaller and Smaller Loans

There is great debate over how big of role of big banks have in spurring economic growth with small business loans. Some analysts argue they're doing enough, while others point to the hefty federal bailouts the nation's biggest banks have received and ask why more of that money isn't being flushed back into the system in order to create job growth and healthy small businesses. We can list some facts, but must keep in mind that facts bend and can be used by virtually anyone to prove a point. First, let's define what constitutes a small business. On a purely financial basis, small businesses or usually thought of as businesses with a revenue of $20 million of less. These businesses depend on banks for loans so they can expand their services and infrastructure and invest in new business models, like e-commerce, cloud services, and virtualization. Without loans, most small businesses can't grow into big businesses.

Unfortunately, recent numbers released by the FDIC paint a dismal picture of the role big banks play in supplying money to small businesses. The top 5 banks in America—Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo, and Goldman Sachs—only contributed 16% of the nation's small business loans, even after these same banks took in a combined $151.59 billion in TARP bailout funds and sit on 40% of the nation's deposits. As a result of these poor loan figures, many small business owners who need loans are not even requesting them. Many financial analysts feel this is not the kind of entrepreneurial atmosphere that will trigger economic growth.  

On the other hand, one can also look at these numbers as signs that financial institutions are practicing more stringent oversight. We've seen what can happen when millions of loans are issued to people who can't repay them. This resulted in the crash of the housing market that contributed greatly to our economic stagnation. While small businesses originally benefited from this inflated consumer confidence, they are now suffering from an epidemic of stingy lenders. Is it that the big banks are trying to prevent a similar crisis from delinquent small business owners by encouraging better credit and more responsible loan delegation? Or do we have reason to think that the institutions who have been deemed “too big to fail” don't feel the same way about America's collective entrepreneurial spirit? After all, if banks are too big to fail, so are the people who invest their money in them.


Unknown said...

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Unknown said...
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Unknown said...

Anyway, what if the borrower that will be asking for a loan approval has a bad credit score? Will he/she still be able to fully get such loan without any restrictions?