February 12, 2024
Governor Michelle Bowman of Federal Reserve Board of Governors Talks Supporting Small Businesses at DC Conference
“Of course, in order to create jobs, small businesses need access to sufficient amounts of affordable credit and capital to form, grow, and succeed. Otherwise, they may underperform, not reaching their growth potential either in revenue or employment. The share of small businesses reporting that they rely on personal sources for capital increased from about half in 2019 to two-thirds in 2022, according to the Fed’s Small Business Credit Survey (or SBCS) from that year. This suggests a high degree of personal risk for owners and their workers. Moreover, personal financial resources are often limited, which can constrain growth. Ideally, small businesses should be able to access external funding, which can be a key to their growth and stability,” says Governor Michelle Bowman of the Federal Reserve Board of Governors.
She goes on to say, “Most businesses that seek external financing turn to banks—community banks and larger institutions. Community banks remain an essential resource for many small businesses to access capital to support their businesses. These banks are focused on relationship banking, which uniquely positions them to meet the challenge of assessing the creditworthiness of local, small businesses. Community banks make greater investments in small business lending relative to larger banks. Furthermore, according to the 2022 Small Business Credit Survey, small businesses were more likely to be satisfied with their experiences dealing with small bank lenders than with large bank lenders or finance companies.
“I’d like to take a moment to share some of the ways the Fed supports small businesses through community banks. First, the Fed engages community banks through its Community Depository Institutions Advisory Council (CDIAC), which advises the Board on matters of public policy. CDIAC members include community bankers who provide insight and information about the economy, lending conditions, and other issues that they see firsthand in their communities. Second, the Federal Reserve supervises and regulates smaller banks based on a variety of factors specific to their size, condition, risk profile, and business model to assess their safety and soundness. One of the Federal Reserve’s unique strengths is the localized nature of our supervision, which relies on regional Reserve Banks that understand their local markets and community needs.
“Many community banks also have a mission to serve historically underserved populations. These include Minority Depository Institutions (MDIs), Women-Owned Depository Institutions (WDIs), and Community Development Financial Institutions (CDFIs). These banks are vital sources of capital to many underrepresented small businesses. For example, the Philadelphia Fed found that community banks, including these unique banks, are traditionally more successful than larger institutions at small business lending in times of crisis.”