lending through the use of sba guarantees. finally, the more noticeable improvement that has already taken place in credit conditions for larger companies should, to some degree, pass through in the form of trade credit to the smaller suppliers or distributors for the larger firms. still, as with improvement in macroeconomic conditions, the impact of the turnaround in bank attitudes and strategies will likely be gradual. as noted earlier, the january sloos also revealed that the credit quality of loans to small firms in the fourth quarter of 2009 was worse than for loans to larger firms, so many banks may move cautiously in making new loans. additional steps to meet the needs of creditworthy small business borrowers despite these prospects for improvement, credit conditions for many small businesses are likely to remain challenging this year. that is why the federal reserve has been placing particular emphasis on ensuring that its supervision and examination policies do not inadvertently impede sound small business lending. if financial institutions retreat from sound lending opportunities because of concerns about criticism from their examiners, their longterm interests and those of small businesses and the economy in general could be negatively affected, as businesses are unable to maintain or expand payrolls or to make otherwise profitable and productive investments. on february 5, the banking agencies issued guidance to examiners that reinforced a simple message – institutions should strive to meet the credit needs of creditworthy small business borrowers, and the supervisory agencies will not hinder those efforts. 3 for the reasons noted earlier, we recognize that the ongoing financial and economic stress has resulted in a decrease in credit availability, including loans to small businesses, and has prompted institutions to review their lending practices. although current loss rates would indicate that a measure of tightening was appropriate and necessary, some institutions may have become overly cautious in their lending practices. thus, while prudence must remain the watchword for both banks and their supervisors, we do not want our examiners to take an overly mechanistic approach to evaluating small business lending. the federal reserve has directed examiners to be mindful of the effects of excessive credit tightening on the broader economy. as a general matter, we do not expect examiners to adversely classify loans based solely on a decline in collateral value where, for example, the borrower has stable revenue streams and thus the ability to repay the loan. we have implemented training for examiners and outreach to the banking industry to underscore this expectation. we are aware that bankers, as well as examiners, may become overly conservative in an

small businesses ; in contrast, about onethird of respondents cited poor sales as their most important problem. commercial bank responses to the sloos continue to indicate reduced demand for loans from small businesses. similarly, a poll conducted by the independent community bankers of america on january 8 revealed that a lack of loan demand was the factor most frequently cited by member institutions as constraining small business lending. improving prospects for small business lending in 2010 improvement in a number of the conditions that depressed lending in 2009, however, lead me to be somewhat optimistic that we may begin to see an increase in bank loans later this year. first, economic conditions, the most important determinant in the demand for, and availability of, small business lending, have improved considerably since the early and middle part of last year. in particular, spending by businesses and households appears to have gained some momentum. however, unemployment remains high, and concerns about the pace of job creation this year may restrain the consumer spending that is essential to overall business confidence. encouragingly, financial market conditions have become more supportive of economic growth, with notable declines in many risk spreads, some resumption of securitization activity, and a rebound of equity prices since their market low in early 2009. while financing conditions certainly remain tight for many small businesses, conditions would be considerably worse were it not for the action taken by the federal reserve and other government agencies in response to the financial crisis. beginning in september 2007, the federal reserve sharply reduced its target for the federal funds rate, which influences interest rates throughout the economy, and since december 2008, the target has been near zero. to improve mortgage market functioning and support housing markets and economic activity more broadly, the federal reserve has purchased large amounts of debt and mortgage - backed securities issued by fannie mae, freddie mac, and ginnie mae in addition to purchasing long - term treasury securities to help improve conditions in private credit markets. in the context of the enormous stress in many markets that characterized the financial crisis, the federal reserve also established new lending facilities and expanded existing facilities to respond to the unusual absence of liquidity in important markets and thereby enhanced the flow of credit to businesses and households. in particular, the federal reserve has provided support to securitization markets, which had been an important source of funding for loans to households and businesses. securitization markets ( other than those for mortgages guaranteed by the government or government - sponsored enterprises ) essentially shut down in mid - 2008.