Below is an excerpt from an article referring to the fact that the contraction of credit for small corporations has ended. After two years of very restrictive lending standards, credit is becoming more available. This is a positive for the economy as many new jobs are created by small businesses.
Credit Eases 'My Pain' as U.S. Bank Lending Buoys Small Business
Khalique Rehman, who runs My Pain Clinic in McDonough, Georgia, got a $1.8 million loan this month from Atlanta-based Private Bank of Buckhead to purchase a new building and construct offices.
“I was surprised because everyone said it would be so difficult,” said the 46-year-old physician, who plans to double the space of his eight-employee practice and hire another doctor and possibly a nurse. “I am really happy.”
The freeze in bank credit is beginning to thaw after two years, signaling more support for the U.S. recovery.
American banks increased credit in July, August and September, the first consecutive gains since October 2008, according to Federal Reserve data released Oct. 15. Commercial and industrial loans rose in July and August after dropping 25 percent, the data showed. Banks eased lending standards in the second quarter for the first time since the credit crisis began, the Fed reported Aug. 16.
The stabilization may help reduce the odds of a relapse into recession next year to less than 10 percent, said Neal Soss, chief economist at Credit Suisse Holdings USA Inc. in New York. That compares with a median estimate of 20 percent during the next 12 months among 48 economists surveyed by Bloomberg News this month.
“Lending is no longer collapsing,” Soss said. “That is a very good thing compared to where we were. When you are in a hole, the first thing is to stop digging deeper. That is where we are: The credit system is not getting weaker.”
Regional bank stocks are likely to benefit from any increase in lending, including Wells Fargo & Co. of San Francisco, PNC Financial Services Group Inc. of Pittsburgh and Fifth Third Bancorp of Cincinnati, said Richard Bove, an analyst at Rochdale Securities in Lutz, Florida.
The pick-up in lending also may boost yields on U.S. Treasury 10-year notes to 4% by the end of 2011, said Mark Zandi, chief economist at Moody’s Analytics. The yield fell to 2.33 percent on Oct. 8 from 4 percent in April as the economy slowed.
“This is a very positive sign for future growth,” the West Chester, Pennsylvania-based economist said. “Non financial corporations are no longer deleveraging. Increasingly it is no longer a question of whether businesses can invest and hire, but whether they are willing. This is a good reason for optimism.”
An increase in bank lending may help the economy expand 2.5 percent next year, he estimates. Growth stalled to an annualized 1.7 percent pace in the second quarter from 5 percent in the last three months of 2009.
Rehman said his 4 1/2-year-old clinic, which specializes in pain, sports medicine and rehabilitation, will move to its new location in Stockbridge, Georgia, after the interior is rebuilt. Processing the loan through closing took about two months.
“Banks are definitely eager,” he said. “Everything went very smoothly. I am quite satisfied.”
Pat Carroll, 31, received a $300,000 loan from Wells Fargo in August to expand his Atlanta apartment-management company with additional properties in Georgia, North Carolina, Tennessee, Texas, Maryland, Virginia and Florida.
“You couldn’t get a loan two years ago,” he said. “Banks are back in business and lending again. Things are starting to loosen up.”
Some borrowers still aren’t seeing much change. Brian Rist, who runs a Fort Myers, Florida-based hurricane-protection company, said he’s disappointed that a loan he’s negotiating may require him to put up family assets as collateral, even though his business is profitable and has $13 million in revenue. He wants to hire another 20 to 25 people to diversify into energy audits for companies and individuals.
Fed data show that most of the credit growth so far comes from banks buying securities including mortgage-backed bonds rather than making loans, as demand, especially among consumers, is still weak. Commercial and industrial loans rose at an annual rate of 1.6 percent in July and 0.4 percent in August after 20 consecutive months of declines and fell 3.5 percent in September, as businesses slowly begin to reverse efforts to shed debt and hoard cash.
Purchases of securities other than Treasury and agency bonds have risen at an annual rate of more than 10 percent for three months, according to the Fed. That indicates lenders are willing to take risks and feel more comfortable about their capital levels, said Paul Kasriel, chief economist at Northern Trust Corp. in Chicago.
“When bank credit reaccelerates, it usually starts with the securities and then moves with a lag to the loan portfolio,” said Kasriel, who worked as a research economist at the Federal Reserve Bank of Chicago. “This appears to be the first sign that banks are willing to commit risk-based capital. We are early in the game.”
Banks also are loosening standards on lending to businesses of all sizes, according to the Fed’s most recent survey of senior loan officers, released Aug. 16.
“The good news is that the tightening of credit standards has passed,” New York Fed President William Dudley said Oct. 10 in Washington. “As time passes, we’ll see a further improvement in credit availability, and as that happens, that will actually support economic activity going forward.”
Zions Bancorporation’s loan business is starting to stabilize, and the Salt Lake City-based bank’s commercial portfolio may be “even growing a little bit,” Chief Executive Officer Harris H. Simmons said Sept. 13 at a Barclays Capital investor conference in New York. “We are very much focused on increasing lending activity.”
