Outside In Banking

The market hit 10,000 today, banks are paying out record bonuses, and at least one writer has declared that, for banks, the recession is over.

In a post about JP Morgan Chase, JJ Hornblass wrote that focusing on credit losses distorts the real picture:

“The mark of the end is in net-interest margins, originations, relative stabilization of loss reserves, and elsewhere. Again, JPM’s credit card unit offers a fine example. JPM’s cards produced net-interest margins 9.10% last quarter, up a hefty 47 basis points from the second quarter. That’s a notable jump in margin. You see similar positives sprinkled throughout JPM’s earnings, such as appreciation in the bank’s leveraged loans portfolio. In all, JPM reported net income of $3.6 billion on revenue of $28.8 billion.

“What these factors imply overall is that the banking business today and going forward is healthy.”

Does this mean that banks will finally start loosening up some lending money for small business?  Unfortunately, that doesn’t seem likely.  Since the bailout, banks have reduced lending at the fastest rate on record.

Here’s what William C. Dudley, president of the Federal Reserve Bank of New York, had to say in a recent speech:

“For small business borrowers, there are three problems. First, the fundamentals of their businesses have often deteriorated because of the length and severity of the recession—making many less creditworthy. Second, some sources of funding for small businesses—credit card borrowing and home equity loans—have dried up as banks have responded to rising credit losses in these areas by tightening credit standards. Third, small businesses have few alternative sources of funds. They are too small to borrow in the capital markets and the Small Business Administration programs are not large enough to accommodate more than a small fraction of the demand from this sector.”

Atlanta Fed research economist, Dr. Melinda Pitts, is equally pessimistic:

“Looking ahead, it’s not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery.”

Small businesses have typically been responsible for about 45% of all U.S. employment.  It’s doubtful they can take that on again without access to credit.

Banks with courage to do so have an unusual opportunity to be heroes here. That’s right, I said heroes. By jump-starting small business, they could actually help end the recession for those outside the banking industry.