See for Yourself Videocase Controversy over Bank Lending Policies The last finan

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See for Yourself Videocase Controversy over Bank Lending Policies The last financial crisis affected people and busi- they were in 2008. This decrease in lending is occurring for nesses in different ways, including the temporary several reasons. At the four largest banks-Wells Fargo, Bank restriction of credit both for businesses and indi- of America, JPMorgan Chase, and Citigroup-lending has fallen viduals. As the recent recession worsened, banks significantly. Interestingly, regulation might be one of the rea- turned inward and significantly reduced or sons for the decrease. Due to increased regulation, large banks stopped lending money, and businesses began having difficulty feel pressured to get rid of their risky loans. This bodes ill for accessing credit. Bank credit usually falls under a business's large banks but is good for smaller regional banks that are not notes payable or long-term debt. This increases liabilities on the subject to these regulatory requirements. The extension of credi balance sheet because businesses must pay off this debt over a at smaller banks has gone up. Small banks may be closer to certain time period. A company that depends too much on credit their customers and can better assess risk, especially in areas might incur long-term debt that it will be unable to pay off, result- such as small business loans and real estate. Many large banks g in bankruptcy. However, during the recession, the opposite have to manage risks on a global basis Another potential theory for why banks are not lending is that they are provided with an incentive not to lend. Some econ- omists believe that because the Fed is paying banks interest on their reserves, these interest payments are convincing banks problem occurred: a severe reduction in credit and loans While credit does result in debt, it is usually necessary in order for small business owners to have the necessary funds available to start a business. Indeed, small business owners were among those most affected by the loss of credit, which in to hold more money in reserve. Every bank is required t turn harmed the economy. It is estimated that the United States a certain amount of money in reserve as a form of protection. ne supports 23 million small businesses, making up roughly Traditionally, banks want to hold as little in reserve as necessary 54 percent of all U.S. sales. Many small businesses that rely on because money that is in reserve cannot earn income. However credit to survive were forced to lay off employees or shut down in 2008 the Fed began to pay interest on reserves. Could this be altogether, resulting in the loss of hundreds of thousands of jobs. one reason why banks are not extending as much credit? The main roadblock that faced people seeking these types of loans was their credit score. Banks hesitated Banks themselves claim otherwise. They state that the rea to lend to anyone son that they are not extending as much credit is due to lack with a credit score of less than 700 out of 850, while the aver- of demand. Nonbanking financial institutions such as insurance age credit score hovers around 680. Financial experts advise companies, finance companies, and venture capital firms are individuals to focus on improving their credit scores as a critical extending loans to businesses globally. These financial institu component of financial security. Additionally, a healthy amount tions are called shadow banks and now represent an estimated of current assets that are liquid-easily converted to cash25 percent of all business loans. Therefore is advisable for businesses, which can then use this cash to pay for in unavailable , perhaps banks should share some of the blame for not being more aggressive in making loans to businesses that have had to go to other f- ventory, equipment, or debt in case credit becomes nancial institutions to acquire the credit they need to operate. Of course, as recovery gains strength, it is possible that by the time you read this, banks may be lending more but facing increasing Now that the United States appears to be in a recovery, one would think that bank lending would increase. H owever, this is not necessarily the case. Bank loans and leases are lower than competition from shadow banks

Explanation / Answer

1. Taking debt for running the business operations is a usual and more reliable practice for the small scale or even for the large scale organizations. This source of finance is a boon for these organization so that they can extend their business operations successfully. Even though this source of finance can support these businesses it is essential that the businesses should hold some assets which can be utilized as credit in the case of emergency. Such credits are also essential for an organization so as to get debit from the financial institutions. The credits hold by an organization will also support it in the case of critical or poor economic situations like the recession.

2. It is essential for the business organizations and the individuals to score good credits so as to obtain attractive loans. The individuals and organizations can score good credits through maintaining profitable business operations, through maintaining a good loan repayment history, having enough assets so that the creditors can take it for security etc.

3. Due to the high-end rules and regulations kept by the financial outsourcing firms for lending the loans the demand for the loans has decreased. The business owners omitted the option of taking loan from banks so as to lead their business operations. This approach has affected the economy adversely as its profitability has gone down. The financial institutions plays a vital role in the GDP growth rate of an economy. When the number of borrowers decreases its contribution to the GDP decreases, hence will affect the economy. Apart from this the small business owners will stop performing business operations due to high credit score rates. this can also affect the economy adversely.

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