Credit Crunch

Banks Ease Credit To Big Companies, But Leave Out Small Business

Posted on Monday, February 7, 2011

In a sign that life may be getting easier for big U.S. corporations, large banks are beginning to make loans more available.
Citing increased competition as an important factor in their decision, banks are starting to ease their standards for lending to big companies, a new survey from the Federal Reserve suggests. But while this may be good news for those at the top of the corporate ladder, it's unclear whether borrowing will lead to new jobs, or whether it will significantly propel the increasingly uneven economic recovery.
Of 57 banks covered in the survey, 30 said they had eased their credit standards or loan terms. But for the most part, this willingness to lend targeted large borrowers. While three banks said they'd eased their standards for lending to small companies, seven said they'd eased up on big borrowers. In every category of loan terms -- size and cost of credit lines, collateral requirements and others -- more banks had eased up for big borrowers than for small ones.
Small businesses seem to have been left out in the cold. While the survey result doesn't necessarily suggest their situation is getting worse, it also doesn't bode well.
"Credit is already so tight," said Michael Rogers, spokesperson for the Small Business Association of Michigan. "Anything that tightens it further is going to hurt small business job-creation."
Indeed, small businesses contribute about 70 percent of the nation's jobs, according to the Obama administration's estimate. As unemployment remains high at 9.4 percent, and as jobs simply do not exist for the majority of unemployed workers, job-creation is a crucial component of the economic recovery.
All business, large and small, depend on bank loans to fund their growth. But big businesses engage in a host of activities -- besides job-creation -- that they can spend their money on.
A full 77 percent of banks that reported an increase in loan demand in the Fed survey said borrowers had an eye toward mergers and acquisitions, the Financial Times notes. While such corporate combinations can win enormous wealth for executives, they don't always create jobs, and they sometimes even cut them.
In recent months, corporations have tended to hoard cash, a defensive position that could come at the expense of job-creation. In the third quarter of last year, U.S. corporations increased their cash holdings by 7.3 percent, setting a new record with $1.9 trillion in liquid assets, according to Federal Reserve data.
Relative to their short-term liabilities, U.S. corporations haven't been sitting on this much cash since 1956.

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