Banking regulators love to come out with surveys that say small businesses have all the access to credit they need. So it was no surprise today that Federal Reserve Governor Frederic Mishkin, testifying before the House Committee on Small Business, went so far as to call access to credit for firms with 500 or fewer employees — the Fed's definition of a small business — "robust."
Further into his testimony, though, Mishkin hedged — a bit, and then a lot. "Recent events have nonetheless almost surely had some negative effects on small business access to credit, and we cannot rule out further effects," he warned.
Indeed, the evidence that credit conditions are deteriorating is not hard to find. According to the Fed's own senior lending officer survey released this week, about one-fifth of respondent banks reported charging higher loan rate spreads to small businesses. Likewise, the National Federation of Independent Businesses noted this month that the net percentage of small business owners reporting loans being harder to get rose to its highest level since 1993. "Perhaps the 'tightening' we heard about on Wall Street is leaking out into the countryside," said the report, written by noted Temple University economist Bill Dunkelberg.
Problems lurking in other parts of the economy are likely to have a spillover effect. For example, many small businesses use personal real estate assets to secure loans, but the value of that real estate is declining. In the last few years, in fact, many banks have created small business line-of-credit products secured by the owner's home.
Those sneaky off-balance-sheet bank conduits could also stall the small-business credit engine. "If banks place on their balance sheets some assets that they had expected instead to place in conduits or otherwise sell to investors, the move could crowd out loans to small businesses and other borrowers," Mishkin pointed out.
Wall Street's blunders are bad for small businesses. That's not good news for entrepreneurs. But at least a federal government employee has finally admitted it, and small businesses can prepare accordingly.
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