Jul 15, 2009
If big banks like Citigroup Inc, Bank of America, JPMorgan Chase, and Goldman Sachs were “too big to fail”, does this mean that less dominant banks should be allowed to fail because they are “too small?” The government seems to think so. The share price of the CIT Group Inc. (CIT) plunged as the company announced that there was very little likelihood that they will receive fresh cash infusion from the government over the near term.
Representatives of the bank scrambled to get a minimum of $2 billion in rescue funding from its current debt holders. As was revealed by CIT representatives to stockholders, there is a high probability that bank might need to file for bankruptcy if it does not receive help. If this happens, the financial market will be tested on its strength and sustainability in financing small and business enterprises (SMEs).
What It Means to the Average Joe Entrepreneur
Individual small business around the country might be “small enough” to fail, but the issue is if they do, they will not go down alone. For example, even small businessmen who are not associated with CIT directly will feel the effects of the bank’s demise if it fails. This is because if their clients, suppliers, and probably even shareholders are drawing credit from CIT, this source of funding will be cut off. There won’t be enough money to pay their partners or buy new products and services.
It is believed that the effects of the bank’s failure will be widespread among small and medium scale businesses. There are around a million small businesses that rely on specialty finance to support their operations. In a 2003 research from the Fed, it was discovered that nonbank lenders account for 28.9 percent of equipment financing, 22 percent of lease financing, and 13 percent of small business credit line.
If companies like CIT cease to exist, small business operations in the United States (accounting for half of the nation’s GDP) is expected to suffer from a bad credit crunch at the time when it is needed the most. The US needs these enterprises to produce, sell goods and services, and hire people to get the country out of recession.
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