Banks Further Tighten Lending Rules For Businesses Large And Small

Just when the economy needs banks to be opening their doors for more lending, they are locking the safe down tight.

According to The Wall Street Journal, "The heavy losses banks have taken on mortgage-related securities are forcing them raise cash levels, leading to tighter lending."

The move toward tighter credit is exactly the kind of action that the Fed and US Treasury would rather not see. Each hoped that lower interest rates would move more money into the markets. The banks could have kept their lending rates high for businesses large and small and with cheap money from the Fed their margins would have sky-rocketed. Instead, banks are holding the cash they bring in from the government and reserving its against future losses.

As the Journal points out, "In a survey of chief financial officers at 468 U.S. companies last month, John Graham, a finance professor at Duke University’s Fuqua School of Business, found that companies with low credit ratings, in particular, were seeing significantly higher credit costs and were having a hard time obtaining or renewing bank credit lines."

Since small businesses often do not have rock solid balance sheets and substantial cash flow to support large lending facilities, they are the most likely firms to be kept out of access to the capital markets. The probable result of that is that firms of modest size cannot expand. In some cases, lack of capital make cause expense cuts, or worse.

The Fed’s problem is fairly simple, but it seems unwilling to take action at this point. Offering cheap capital to banks should come with a pledge from the lenders. Their access to government cash has to be matched by a program which will make sure that they lend 70% or 80% of that capital back into the market.

Douglas A. McIntyre