There are signs that the economy might be in more trouble in the near future. One of the symptoms of the recession was the credit crunch. Banks and other lending institutions tightened up their previously loose standards for extending credit, and in order to prop up their own organizations financially, banks held on to the cheap money afforded to them by the government rather than extending loans to small businesses needing the cash flow to expand or operate, extending the recession.
A number of policies were designed to help small businesses when practically-free loans from the government weren’t enough to encourage banks to do anything but prop up their balance sheets. The FDIC instituted a policy where they would insure noninterest-bearing accounts without a limit. This is different than the insurance consumers receive on up to $250,000 on savings and checking accounts. The extended FDIC coverage allows businesses to keep their operating accounts — which are mostly used for paying employees with direct deposit — at smaller banks, seen as being at risk for failing moreso than large, “too-big-to-fail” banks.
This FDIC benefit is scheduled to end before January 1, 2013. The expected reaction is for small businesses to take their operating funds out of community banks and return to larger banks, where size is assumed to correlate to strength. Small banks, which have recently begun extending more credit to local businesses, will no longer have the funds to continue this practice.
There is a chance that the FDIC program will continue, but that requires dependency on politicians being interested in changing the direction it gave the FDIC and being willing to continue the expense, whether from government (public) sources or from fees received from FDIC member institutions.
At the same time the potential shift from community banks to large, national banks hangs over the head of those who are concerned about the possibility of another credit crunch, big banks have already reined in their lending. In the first quarter of 2012, credit card and bank lending has dropped.
JPMorgan Chase, Wells Fargo, Bank of America and Citigroup cut their lending by a collective $24 billion in the first three months of the year. That was a change from last year when lending rose $34 billion at the nation’s four biggest banks in all of 2012.
Plan for the next credit crunch now
The individuals hurt the hardest during a credit crunch are people barely living paycheck to paycheck, relying on credit cards to meet their financial obligations, but by far the worst of the credit crunch is felt by small business owners who rely on bank credit, particularly during times of recession, to stay in business.
Families with the most exposure in a credit crunch can prepare by growing and nurturing an emergency fund. I’ve been promoting emergency funds during the best and worst economic times, and those who use the good times to shore up resources to survive the hard times make it through. It’s an economic policy as old as the Bible. Small business owners should take the same approach.
With a credit crunch, interest rates will continue to remain low, encouraging a money to flow as freely as possible. Those who qualify for borrowing with the stricter criteria in a credit crunch can take advantage of the opportunity to borrow money at low rates and invest in hard assets with a physical presence. Real estate and art come to mind.
Published or updated May 1, 2012.