The Treasury Department said it is working with the Federal Reserve on a plan to make access to credit easier for small businesses.
Maintaining that illiquidity in the asset-backed securitization market is affecting the availability of car loans, student loans, and credit cards, Acting Assistant Treasury Secretary for Financial Markets Karthik Ramanathan told the House Small Business Committee that the government is exploring the development of a liquidity facility for highly-rated AAA asset-backed securities.
“Such a facility could lower costs and increase credit availability for consumers and small businesses. Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy,” Ramanathan told lawmakers.
He said the slowdown in economic activity and consumer discretionary spending has affected nearly every sector of the U.S. economy, including small business.
“Small businesses have also felt these strains, and when small businesses suffer, the rest of the economy does as well. Small businesses make a substantial and stable contribution to our economic growth, consistently producing about one-half of private nonfarm GDP. If small business cannot meet their capital needs, they will be unable to fulfill their usual role in driving economic recovery,” he said.
He said the small business retail and restaurant trade sector, which represent 90 percent of all such firms, have been particularly hard hit, losing an estimated 250,000 jobs in the past year.
The home construction industry, where small businesses make up 80 percent of firms, has also been particularly affected by declining home values and credit market conditions.
Equipment manufacturers have also reported large declines in new orders, capital spending and technology upgrades have slowed significantly, and the drying up of liquidity has made these businesses less able to obtain loans and even meet payrolls, he said.
“The global financial crisis and tight credit markets have made it harder for small businesses to borrow the money they need to meet their payrolls, create new jobs, and invest in the future,” he said.
He said Treasury officials are aware that much of the current lack of confidence arises from concerns of suppliers and manufacturers about the availability of credit to fund and grow their business.
As part of its efforts, the Treasury has broadened its capital purchase program to smaller community banks which interact on a day-to-day basis with small businesses. “Importantly, many of these privately held institutions have strong, long lasting ties with local businesses. By providing capital to such institutions, Treasury is directly assisting small businesses so that they have the ability to make loans, mitigate funding pressures, and promote growth locally,” he said.
In addition to providing capital directly to banks, Treasury is also considering supporting access to credit outside the banking system, such as credit card receivables, which are important for consumers and small businesses. “This market is currently in distress – costs of funding have skyrocketed and new issue activity has come to a halt,” he said, drawing attention to the plan underway to create a liquidity facility for highly-rated AAA asset-backed securities which would hopefully lower costs and increase credit availability for consumers and small businesses.
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