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Big Banks Boost Small-Business Lending

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Lending to small businesses by their traditional creditors — community banks — continued to contract sharply in the year that ended June 30, according to data published Aug. 23.

But the decline in overall lending to small businesses slowed in the second quarter as data indicates that large banks opened up the taps on small-business credit cards.

Small-business loans — or commercial loans with original balances of $1 million or less — fell 6.9% in the year through June 30, to $607 billion, according to the Federal Deposit Insurance Corp., a bit faster than the 6.2% drop in the preceding 12 months (see charts).

However, small-business lending only fell at a 1.5% annual rate in the second quarter, as banks with more than $10 billion of assets ramped up such loans at a 3.7% annual rate. The biggest component of that growth was a $1.4 billion increase in loans with original amounts of $100,000 or less, a category largely made up of small-business credit cards. (Farm loans have been excluded from the data examined here.)

Small-business lending has been shrinking since the recession, with big banks lagging the industrywide contraction in the years ended June 30, 2009, and June 30, 2010, but outpacing the industrywide decline in the last 12 months. (Until the FDIC began collecting it quarterly in 2010, small-business lending data was reported annually at June 30.)

Mergers that move institutions into and out of different size categories can swing loan trends tracked by asset class, and probably help explain the volatility in small-business lending by banks with assets of $2 billion to $10 billion, which only fell 2.4% in the year through June 30 after an 8% drop during the year prior.

Still, the reemergence of small-balance loan growth at big banks could signal the resumption of a long-standing trend where the concentration of the credit card business among a handful of giant issuers has tended to siphon small-business lending share away from small banks.

Exceptions for small-business cards under recently enacted legislation are one force for growth, according to Brian Riley, a research director at TowerGroup.

Small-business cards are "a nice place to do aggressive lending because they are a lot less subject to interest rate issues and everything else," he said.

The continuing contraction in small-business lending among banks with less than $10 billion of assets has occurred amid efforts to induce them to provide more credit to such borrowers. Small banks, whose balance sheets continue to be packed with a disproportionate share of small-business loans, blame weak demand and heavy-handed examiners.

"The quality loan demand itself is down," said Paul Merski, the chief economist at the Independent Community Bankers of America. Also, the "bank regulatory environment has forced banks to pull in their horns."

Another factor is softness in the real estate market, Merski said, as supervisors strictly limit exposure to property loans.

"That's what community banks in many areas of the country are specializing in," he said. "And if you can't do what they specialize in, you aren't going to do well. Banks are afraid to make good loans."

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