Credit Is Loosening for Small Business: Fed's Duke

Elizabeth Duke, Federal Reserve Governor
Elizabeth Duke, Federal Reserve Governor

Credit is gradually loosening up for small businesses, Federal Reserve Governor Elizabeth Duke told CNBC Monday.

“What’s happening in the credit cycle is that banks are moving now from looking at collection problems to putting more loans on their books, which they need to do to keep income coming in over the longer term,” said Duke, speaking from Washington, where she is attending the Fed's forum on small business.

The Fed governor also said that even though banks have about $1.3 trillion in reserves, the agency can’t do anything to persuade them to loan the money to businesses. Duke predicted that more lending and borrowing will happen when the economy improvesand there is more optimism about business.

Duke noted that the loan situation remains challenging for small businesses, but said there have been improvements, in part because of some of the Fed’s actions.

She said the Fed has conducted some 40 meetings at all the reserve banks, which brought together small business leaders, lenders, bank examiners and heads of nonprofit organizations.

She added that banks are also taking a second look at loan applications they had rejected earlier and are now employing a more comprehensive approach to decision-making.

"Banks are trying to dig deeper than purely credit scores," she said. "They are looking at cash flows. They're looking at prospects."

Kevin Watters of JP Morgan Chase told CNBC Monday that the bank had committed billions of dollars this year to loan to small businesses.

Duke, who began her banking career as a part-time teller and went on to become an executive at many banks, advocates financial literacy for all Americans through a number of initiatives, including classes for children in K-12 grades.