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Banks and the availability of small business loans

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  • Joe Peek
  • Eric S. Rosengren

Abstract

Investigators examining problems with credit availability during the most recent recession have been unable to provide definitive evidence that the decline in bank loans was, at least in part, a supply phenomenon. Furthermore, they have not focused on the subset of loans made to borrowers most likely to be dependent on bank financing. This study overcomes these flaws. By examining formal regulatory actions, we clearly identify a supply shock that caused an abrupt decline in bank lending that cannot be attributed to demand. Furthermore, we find that this decreased lending occurred at institutions and in lending categories serving those firms most likely to be dependent on bank financing. This decline in lending to small businesses was likely a contributing factor to the unprecedented increase in business failures in New England.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 95-1.

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Date of creation: 1995
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Handle: RePEc:fip:fedbwp:95-1

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Keywords: Bank loans ; Small business;

References

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  1. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  2. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  3. Joe Peek & Eric Rosengren, 1991. "The capital crunch: neither a borrower nor a lender be," Working Papers 91-4, Federal Reserve Bank of Boston.
  4. Diana Hancock & James A. Wilcox, 1992. "The effect on bank assets of business conditions and capital shortfalls," Proceedings 373, Federal Reserve Bank of Chicago.
  5. Joe Peek & Eric S. Rosengren, 1994. "Bank Real Estate Lending and the New England Capital Crunch," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 33-58.
  6. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
  7. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  8. Anil K. Kashyap & Jeremy C. Stein & David W. Wilcox, 1991. "Monetary policy and credit conditions: evidence from the composition of external finance," Finance and Economics Discussion Series 154, Board of Governors of the Federal Reserve System (U.S.).
  9. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May.
  10. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. " The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-66, March.
  11. Hall, B.J., 1993. "How Has the Basle Accord Affected Bank Portfolios?," Harvard Institute of Economic Research Working Papers 1642, Harvard - Institute of Economic Research.
  12. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June.
  13. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  14. Gregory E. Elliehausen & John D. Wolken, 1990. "Banking markets and the use of financial services by small and medium- sized businesses," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 801-817.
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Citations

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Cited by:
  1. Joe Peek & Eric S. Rosengren, 1996. "Derivatives Activity at Troubled Banks," Boston College Working Papers in Economics 358, Boston College Department of Economics.
  2. Stephen D. Oliner & Glenn D. Rudebusch, 1995. "Is there a bank lending channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 1-20.
  3. Joe Peek & Eric S. Rosengren, 1995. "Bank regulatory agreements and real estate lending," Working Papers 95-2, Federal Reserve Bank of Boston.
  4. Joe Peek & Eric S. Rosengren, 1996. "The International Transmission of Financial Shocks: The Case of Japan," Boston College Working Papers in Economics 357, Boston College Department of Economics.
  5. Joe Peek & Eric S. Rosengren, 1996. "Will legislated early intervention prevent the next banking crisis?," Working Papers 96-5, Federal Reserve Bank of Boston.
  6. Stanton, Sonya Williams, 1998. "The Underinvestment Problem and Patterns in Bank Lending," Journal of Financial Intermediation, Elsevier, vol. 7(3), pages 293-326, July.
  7. Clara Cardone & Maria-Jose Casasola & Margarita Samartin, 2005. "Do Banking Relationships Improve Credit Conditions For Spanish Smes?," Business Economics Working Papers wb052806, Universidad Carlos III, Departamento de Economía de la Empresa.
  8. Hancock, Diana & Wilcox, James A., 1998. "The "credit crunch" and the availability of credit to small business," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 983-1014, August.
  9. Geoffrey M. B. Tootell, 1996. "Can studies of application denials and mortgage defaults uncover taste-based discrimination?," Working Papers 96-10, Federal Reserve Bank of Boston.
  10. Federico Ferretti, 2007. "Consumer credit information systems: a critical review of the literature. Too little attention paid by Lawyers?," European Journal of Law and Economics, Springer, vol. 23(1), pages 71-88, February.
  11. Houston, Joel F. & James, Christopher, 1998. "Do bank internal capital markets promote lending?," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 899-918, August.
  12. Joe Peek & Eric S. Rosengren, 1995. "Small business credit availability: how important is size of lender?," Working Papers 95-5, Federal Reserve Bank of Boston.
  13. R. Alton Gilbert & Mark D. Vaughan, 2000. "Do depositors care about enforcement actions?," Working Papers 2000-020, Federal Reserve Bank of St. Louis.

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