Blog: Big Banks and Small Businesses: Supporting Entrepreneurs Across America

By Sean Campbell, Director of Policy Research

Small businesses are the lifeblood of a dynamic and growing economy.  So much of our nation’s economic success is tied to the success of small enterprises that were started with a single good idea that then went on to spur entire industries employing thousands of people.  Consider Apple, Amazon, and Hewlett Packard, just to name a few.   And while most new ventures do not turn into industry juggernauts, small businesses are an important source of employment, growth, and dynamism in our economy.  According to the U.S. Census Bureau, as of 2017, 42 million Americans work in firms with fewer than 100 employees, which means that the lives of many Americans are tied to the success of small businesses.  In this post, we describe some of the facts about small business lending among Financial Services Forum members, provide some specific examples of the types of small business lending programs that are supported by our institutions, and discuss the potential link between regulation and trends in small business lending.

Small businesses contribute significantly to the U.S. economy, and Forum members play an important role in their success by providing the necessary credit to small businesses throughout the country, across an array of communities.

Forum members are a significant source of credit to small businesses.  As shown in Figure 1, as of June 2018, loans to small businesses held by Forum members exceeded $86 billion, nearly double the amount measured in 2007.  Moreover, as a proportion of all small business lending, Forum members’ lending accounts for roughly 25 percent of all small business loans.  The loans summarized in Figure 1 are those commercial and industrial loans that are made with an original loan amount less than $1 million.  While this is the government’s definition of “small business loan,” a loan of $1 million or even several hundred thousand dollars may seem like a very large loan to many small businesses.

Sources: Federal Reserve data, Assets and Liabilities of Commercial Banks in the United States – H.8, available at https://www.federalreserve.gov/releases/h8/default.htm; FR Y-9C data, available at https://www.ffiec.gov/nicpubweb/nicweb/HCSGreaterThan10B.aspx

 

In Figure 2, loans with an original amount less than $100,000 are shown to examine lending that is more likely to be received by small businesses.  As of June 2018, Forum members maintain $54 billion in loans that have an original amount less than $100,000, more than double the amount in 2007.  What’s more, Forum members account for one-third of all lending below $100,000, which further shows how Forum members are making a difference to small businesses.

Sources: Federal Reserve data, Assets and Liabilities of Commercial Banks in the United States – H.8, available at https://www.federalreserve.gov/releases/h8/default.htm; FR Y-9C data, available at https://www.ffiec.gov/nicpubweb/nicweb/HCSGreaterThan10B.aspx

 

The aggregate data on small business lending is useful for assessing overall trends, but they do not provide much insight about the distribution of such lending across the United States.  The graphical data presented in Figure 3 show average per capita small business loan originations by Forum members across the United States between 2010 and 2016.  As the map illustrates, Forum members are extending credit to small businesses across the United States and in every size of community.

Sources: FFIEC Community Reinvestment Act, available at https://www.ffiec.gov/cra/default.htm, U.S. Census Bureau County Population Totals, available at https://www.census.gov/data/datasets/2017/demo/popest/counties-total.html

 

In particular, Figure 4 shows small business loans originated in large and small communities.  For the purposes of Figure 4, communities are identified with U.S. counties, and a county is identified as small if its population is below 500,000, per government reporting standards.  As shown in Figure 4, Forum members originated more than $16 billion in small business loans per year in small communities during the 2010-2016 period, accounting for roughly one-third of all small business loan originations made by Forum members.  Accordingly, Forum members are actively supporting small businesses in smaller communities all across the nation.

Source: FFIEC Community Reinvestment Act, available at https://www.ffiec.gov/cra/default.htm

 

Even with this broad view of small business lending across America, it is easy to get “lost in the numbers” and forget how small business lending can transform people’s lives.  Amidst these numbers, it is important to recognize that Forum members support ongoing lending initiatives that affect people in communities throughout the nation.  For example:

  • Bank of America supports lending to veterans through its Veteran Entrepreneur Lending initiative, which benefits veterans across all 50 states and the District of Columbia.
  • Citigroup supports small businesses through its City Accelerator initiative, which provides grants to selected cities as well as technical assistance to help strengthen local minority entrepreneurs’ access to the necessary financial resources.
  • Goldman Sachs operates its 10,000 Small Businesses initiative by partnering with community colleges and other local non-profits to provide loans to entrepreneurs and access to education.
  • JPMorgan Chase supports the Entrepreneurs of Color (EOC) Fund, which provides financing to minority-owned small businesses. Recently, the EOC Fund has tripled in size and recent successes in cities like Detroit are serving as a model to expand small business loans in New York and San Francisco.
  • In 2016, Morgan Stanley worked with the National Urban League and other non-profits to create the Capital Access Fund (CAF) for Greater Cleveland to provide funding for minority entrepreneurs. Morgan Stanley is working with the National Urban League to identify other geographic areas that could benefit from a similar initiative.
  • Wells Fargo supports small businesses through its Wells Fargo Works for Small Business Diverse Community Capital initiative by providing capital grants to community development financial institutions.

All of these initiatives differ in their specific goals and only represent a small share of each Forum member’s total lending to small businesses, but each of these initiatives represents a tangible and serious commitment to supporting small businesses across a diverse array of communities.

Despite the positive news on the small business lending front, small business lending has faced headwinds over the past several years.  Figure 5 presents the total amount of small business lending by all commercial banks in the U.S. as measured by the FDIC.  These data clearly show a sharp decline in small business lending around a decade ago that has only slowly recovered since that time.

Source: FDIC Quarterly Banking, available at https://www.fdic.gov/bank/analytical/qbp/

 

A number of researchers have tried to understand the reasons underlying the slow recovery in small business lending.  A recent research paper by Michael Bordo and John Duca suggests that increased regulatory burden resulting from the Dodd-Frank Act (DFA) has played a role in limiting the growth in small business lending.  Figure 6, taken directly from their research paper, shows the share of all business loans made to small businesses.  The Figure shows that the small business share of all business loans started to decline after the passage of DFA.  Moreover, the authors find that “by increasing the fixed regulatory compliance requirements needed to make business loans and operate a bank, the DFA disproportionately reduced the incentives for all banks to make very modest loans.”

Source: National Bureau of Economic Research, Borado and Duca “The Impact of the Dodd-Frank Act on Small Businesses” (2018), available at http://www.nber.org/papers/w24501.pdf

 

The authors do stress that these regulatory burdens were most pronounced for smaller banks, but also recognize that the increased burden is experienced by all banks.  As such, it would be worthwhile for regulators to consider these findings and examine ways that regulations could be modified to help remove disincentives for small business lending.

Small businesses contribute significantly to the U.S. economy, and Forum members play an important role in their success by providing the necessary credit to small businesses throughout the country, across an array of communities.  During the past decade, Forum members’ lending to small businesses has increased measurably, and much of that increase has come from smaller loans that support people across the country, such as U.S. military veterans, small business owners in Detroit, and minority entrepreneurs.  An examination of bank regulations that may inhibit small business lending could prove useful in helping to ensure that small businesses across America continue to thrive and are able to turn today’s great ideas into tomorrow’s success stories.

 

Read more in our “Big Banks and Small Businesses” research deck.

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