Lack of small business knowledge fostering extreme caution in lending; because there is no useful credit risk transfer option for smaller loans, lending institutions know that they can’t trade out of a loan and instead must bear the entire risk.
While lending to large companies is rising steadily across the globe, small- and medium-sized businesses struggle to obtain financing. Maximizing Results, Minimizing Risks, a new paper examines the reasons for the reluctance to lend to small businesses and what the financial services industry needs to do to help this important sector stay funded.
The paper also looks at the recent history of lending, the circumstances that led to the financial crisis of 2007, and the banking industry’s current efforts to avoid those same mistakes.
“Because there is no useful credit risk transfer option for smaller loans, lending institutions know that they can’t trade out of a loan and instead must bear the entire risk”
The temptation is for banks to steer clear of multiple, harder-to-understand small and middle market loans in favour of fewer larger, but safer credits. This bias toward large organizations might minimize the risks for financial institutions in the near term, but it limits growth in the long term.
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