Banks keep lending standards tight for small firms

Posted at 9:29 PM, Aug 06, 2012

NEW YORK (CNNMoney) — Since the recession, small businesses trying to get bank loans have faced tougher credit standards — and little has changed.

In the Federal Reserve’s most recent survey of bank loan officers, released Monday, 95% said credit standards remained basically unchanged during the second quarter.

Less than 5% reported easing standards. Although that number is higher than in the previous two quarters, it still pales in comparison to the share of banks that reported tightening standards during the recession.

However, the survey of 61 large domestic banks doesn’t address a greater economic indicator: demand for small business loans.

Community bankers and industry experts say small firms are avoiding debt, because they see little reason to do so. Consumer demand remains weak, said Rohit Arora, CEO of small firm loan marketplace Biz2Credit.

What the Federal Reserve survey does reveal, though, is that those who are looking for credit aren’t finding it any easier.

One reason cited by community banks is that they are now required to hold on to more funds, restricting their ability to make loans as easily.

Paul Merski, chief economist of the Independent Community Bankers of America, said bankers are wary of loosening standards in what he called “such a restrictive regulatory environment.”

The higher capital requirements proposed in Basel III, an international agreement that could soon affect the U.S. banking industry, are also having a chilling effect, Merski said. Banks are holding back now to prepare for the higher required reserves.

“It’s very difficult to raise fresh capital, so you have to start to build up that capital now,” Merski said. “One way you build it up is to hold more back.”