Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Committee on Small Business of the U.S. House of Representatives, March 17, 1994 - Statements to Congress - Transcript

Federal Reserve Bulletin, May, 1994

More generally, in the first two months of this year, growth of business loans at all domestic banks has strengthened. Total commercial and industrial loans increased at an average annual rate of 7.5 percent in January and February. In the latest survey of bank lending officers, respondents indicated that the demand for loans by businesses has firmed, largely reflecting increased needs to finance inventories and investment in plant and equipment.

These signs of a greater willingness to borrow and spend on the part of businesses are quite encouraging. Moreover, banks, which are better capatilized and more liquid than they have been in a long while, appear to be able and willing to meet the rising credit demands. I believe that in this environment, the recent initiatives taken in the supervisory area will help to facilitate new lending, particulary to smaller borrowers.

NEED FOR ADDITIONAL INITIATIVES?

You asked my opinion about the need for additional initiatives. In this regard, I view the steps that have recently been taken as an ongoing part of the supervisory process. This process is never complete. Regulators always have to remain vigilant to possibilities for reducing burdens and making the supervisory process more efficient. We must guard against implementing new policies that might unnecessarily impede the pending process. We also must be aware of special situations, such as those resulting from the California earthquake, when there may be a need to ease standards temporarily.

And, while supervision alone can play only a limited role in spurring aggregate lending, there is scope for the Congress and the agencies to work together to foster an environment for banks that will allow them to make sound loans and to compete efficiently in financial markets. Important in this regard are the initiatives now before the Congress related to interstate banking and broaders powers for banks.

ADEQUACY OF CALL REPORT DATA ON SMALL BUSINESSES AND FARMS

Let me conclude by commenting on the adequacy of data for assessing credit availability to small businesses. In particular, you have asked about the new data we now collect on the Call Reports. The new Call Report data are a good, albeit not perfect, measure of bank lending to small businesses. We believe that their usefulness as an indicator of trends in bank credit flows to small borrowers will increase each year as we collect more observations and that the data will be a valuable supplement to information we gather from our sources.

Our experience with the data reported for the first time in June revealed, as might be expected, a number of reporting problems that needed to be resolved. Consequently, the staff members of the relevant agencies have made a number of changes to the reporting instructions designed to clarify definitions and improve the quality of the reported statistics. The agencies, however, did not see the need to add items to the report or to collect information by size of borrower instead of size of loan, for several reasons.