From Forbes.com. Read the entire article HERE.
WASHINGTON (Thomson Financial) – Market turbulence and tightening credit conditions are not expected to have a significant impact on small business loans, although the Federal Reserve Board is continuing to monitor the situation to be sure, Federal Reserve Board Governor Fred Mishkin told members of Congress today.
‘There are good reasons to believe, and some evidence to suggest, that the recent financial market disruptions have not seriously harmed access to credit by small businesses, and if the disruptions continue to be resolved in an orderly manner, will be unlikely to do so in the future,’ Mishkin said in prepared testimony before the House Committee on Small Business.
Mishkin stressed that the Fed’s conclusion on this issue is preliminary, as there is little hard data that small companies will escape tighter credit conditions that have hit other sectors of the economy. He also said it is possible that poor market conditions ‘could spill over to the market for small business loans,’ and said the Fed’s recent decisions to lower the federal funds rate was meant to offset tight credit conditions on the broader economy.
However, Mishkin noted several factors that give the Fed reason to believe small business’s access to credit will remain largely unaffected.
For example, he said the securitization of small business loans has been ‘modest,’ meaning the recent market turmoil related to securitized real estate and other loans is not expected to have a ‘large direct effect’ on small business lending.
Also, large banks tend to be more involved in loan securitization markets and thus are more exposed to the recent market disruptions, unlike smaller banks that tend to be more involved in small business lending.
‘These banks are relatively unaffected by disruptions to the securitization markets,’ he said. ‘Thus, once again, we would expect that the direct effect of current events on small businesses would be limited.’
Mishkin also said the Fed’s conversation with bankers shows that small business loans are expanded at a ‘fairly robust pace’ through mid-October. ‘Such data and our conversations with bankers suggest that, at least to date, the supply of credit to small businesses remains healthy,’ he said.
Nonetheless, Mishkin said small businesses will likely feel some side effects of the credit crunch, such as through higher risk premiums and overall tighter credit standards. He said the Fed’s senior loan officer survey shows that bank lending practices have tightened over the last three months, and that a survey of independent businesses in early September shows credit has been harder to obtain for small companies.
‘While these survey data certainly suggest that some tightening has occurred, it is important to observe that they also suggest that, at least for now, the effects have generally been quite limited,’ Mishkin said.
Mishkin said the Fed would continue to monitor small business access to credit, and in particular whether the tendency of small companies to use real estate to secure loans will be affected by a drop in real estate prices. He also said the Fed would watch to see if bank lending is constrained by bank losses related to the housing downturn.
He said the health of small companies is critical to the health of the US economy, since these companies with less than 500 employees are responsible for the employment of half of all US private sector workers, and create half of the new jobs created each year.
Mishkin spoke just weeks after the Fed turned in its latest analysis on small business lending, a topic on which is it required to report to Congress every five years.
He said the latest report, covering 2002 through to early 2007, showed that financing flows to large and small companies has increased, and that 80 pct of the small companies that applied for credit received it.