How Did the Financial Crisis Affect Small-Business Lending in the U.S.?
Rebel A. Cole
Driehaus College of Business at DePaul University
May 21, 2012
Abstract:
We use a panel regression model with both bank- and year-fixed effects to analyze changes in U.S. bank lending to small businesses in a multivariate setting. Our results show that bank lending to all businesses and, in particular, to small businesses, declined precipitously following onset of the financial crisis. We also examine the relative changes in business lending by banks that did, and did not, receive TARP funds from the U.S. Treasury following onset of the crisis in 2008. Our analysis reveals that banks receiving capital injections from the TARP failed to increase their small-business lending; instead, they decreased their lending by even more than other banks. This evidence shows that the TARP’s Capital Purchase Program was largely a failure. Our study also provides important new evidence on the determinants of business lending. Most importantly, we find a strong and significant positive relation between bank capital adequacy and business lending, especially lending to small businesses. This new evidence refutes claims by the U.S. banking industry that higher capital standards would reduce business lending and hurt the economy. Instead, it shows that higher capital standards would improve the availability of credit to U.S. firms, especially to small businesses.
