A new survey sponsored by FICO, the credit score folks, found the many of the country's small banks, the ones that aren't too big to fail, are in pretty bad financial shape. So much so that many are unable to lend money to small businesses, thus dampening any hope in that segment of the economy to create badly needed new jobs.
The survey, which was actually conducted for FICO by Professional Risk Managers' International Association, or PRMIA, indicate the credit gap that has been blamed for a reduction in U.S. consumer spending is likely to continue well into 2011.
And here we thought the economy was getting better or at least that's what recent government statistics would lead you to believe. I guess it all depends on how you look at it.
Bank risk managers may see things a little differently and that's who was polled for the FICO survey. They say small banks can't meet the credit demands of small businesses because they are in such bad shape financially.
At least one statistic seems to bear that out. Last week, the Federal Deposit Insurance Corporation, better known as the FDIC, revealed that the number of troubled banks in this country had risen from 829 to 860 in the past three months and that most of them were small banks. As you know, the FDIC is the entity that guarantees our savings accounts in some 7,715 American banks.
According to government figures, 141 American banks failed during the first 11 months of this year, exceeding the 140 failures that occurred in all of 2009 and making 2010 one of the worst years in the country's history for bank failures.
Unfortunately, the worst may not be over. Nearly 54% of survey respondents expect the number of banks on the FDIC's Problem Bank List to grow in 2011.
When a small bank gets in trouble, the pain is felt throughout the community, especially among the small businesses that count on them for credit. They do this because larger banks won't even talk to them. That may change now that the financial crisis has taken such a toll among the smaller banks that didn't receive any TARP bailout money. These banks are finding themselves having to deal with huge losses from bad commercial real estate loans. That in turn has left them unable to lend even to companies that have good credit.
With unemployment nearing double digits, or higher according to some, this puts our nation between a rock and a hard place. Economists say that small businesses create the majority of the country's jobs, as much as 70%, by some estimates. But how are they going to be able to do that if they can't borrow money to expand and hire?
The FICO survey found that credit will remain tight for small businesses. Over 59% expect the amount of credit requested by small businesses to increase over the next six months but less than 37% expect lenders to increase the amount of credit extended to small businesses.
Dr. Andrew Jennings, chief research officer at FICO and head of FICO Labs, which works with PRMIA on the quarterly survey said "we continue to see a significant gap between expectations for credit demand and credit supply. He added that this "could be a big blow to an already-fragile economy.
