I wrote about the unintended consequences of artificially low rates a few months ago. A recent Wall Street Journal article examined another result of the ongoing stimulus – the unwillingness of big banks to loan to small businesses.
After all, banks exist to make money for their shareholders; ranking out tiny loans to non-Fortune 500 companies isn’t likely to move the needle. The result is the development of so-called shadow banks, which are much more willing to lend. According to the WSJ article, nonbank lenders now account for 26% of all loans to small businesses, up from 10% in 2009. But they charge much higher rates – often multiples of the typical 5% to 6% that banks levy.
A move by the Fed to raise rates would serve to increase the profit margin for such loans, making them more appealing to banks. The potential result is a reduction in borrowing costs for small businesses, assuming banks can gain market share from nonbank lenders.