Credit scoring and loan securitizations will reduce the cost of small-business borrowing in the near future, Federal Reserve Board Gov. Lawrence B. Lindsey said Wednesday.
"New technologies and information flows are providing opportunities for banks and other lenders to more efficiently evaluate risks and lower the costs of small-business lending," Mr. Lindsey said.
His remarks were prepared for the Federal Reserve Bank of Richmond's small-business development conference.
Large banks are developing data bases filled with historical information on small-business loans, he said. This information will permit them to create scoring systems that accurately and inexpensively peg the risk of default.
When banks start using common credit scoring systems, they will be able to resell loans on the secondary market, he said.
"A key benefit of securitization is that it potentially increases the liquidity of small-business lending and provides banks and other lenders with additional sources of funds," he said.
Mr. Lindsey said small businesses should not worry about qualifying for credit under a standardized credit scoring system.
"Clearly not all small-business loans are going to be appropriate candidates for securitization, and not all banks will wish to adopt complex statistical models for managing risk," he said. "There will continue to be a market for nonstandard small-business lending and roles for regional and community banks."