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The "credit crunch" and the availability of credit to small business

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  • Hancock, Diana
  • Wilcox, James A.

Abstract

We present estimates of how much bank loans and real activity in small businesses responded to changes in banks' capital conditions and other bank and aggregate economic conditions. Using data for 1989 through 1992 by state, we estimated the effects of those factors on employment, payrolls, and the number of firms by firm size, as well as on gross state product. In response to declines in their own bank capital, small banks shrank their loan portfolios considerably more than large banks did. Large banks tended to increase loans more when small banks were under increased capital pressure. Real economic activity was reduced more by capital declines and by loan declines at small banks than at large banks. Small banks were making "high-powered loans" in that dollar-for-dollar loan declines in their loans had larger impacts on economic activity than loan declines at large banks did. Capital declines at small banks produced larger changes in economic activity dollar-for-dollar than capital declines at large banks did. Aggregate economic conditions had smaller effects on small firms than on large firms and smaller effects on small banks than on large banks. The evidence hinted that the volume of loans made under Small Business Administration (SBA) loan guarantee programs shrank less in response to declines in bank capital than the volume of loans not made under the SBA loan guarantee programs.
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  • 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.
  • Handle: RePEc:eee:jbfina:v:22:y:1998:i:6-8:p:983-1014
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    References listed on IDEAS

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    1. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    2. Hancock, Diana & Wilcox, James A., 1994. "Bank Capital, Loan Delinquencies, and Real Estate Lending," Journal of Housing Economics, Elsevier, vol. 3(2), pages 121-146, June.
    3. Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, vol. 25(1), pages 99-122, November.
    4. Kashyap, Anil K. & Stein, Jeremy C., 1995. "The impact of monetary policy on bank balance sheets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 151-195, June.
    5. Hancock, Diana & Laing, Andrew J. & Wilcox, James A., 1995. "Bank capital shocks: Dynamic effects on securities, loans, and capital," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 661-677, June.
    6. 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.
    7. Joe Peek & Eric S. Rosengren, 1995. "Banks and the availability of small business loans," Working Papers 95-1, Federal Reserve Bank of Boston.
    8. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-638, August.
    9. Diana Hancock & James A. Wilcox, 1994. "Bank Capital and the Credit Crunch: The Roles of Risk-Weighted and Unweighted Capital Regulations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 59-94.
    10. Berger, Allen N. & Saunders, Anthony & Scalise, Joseph M. & Udell, Gregory F., 1998. "The effects of bank mergers and acquisitions on small business lending," Journal of Financial Economics, Elsevier, vol. 50(2), pages 187-229, November.
    11. 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.
    12. 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.
    13. Allen N. Berger & Anil K. Kashyap & Joseph M. Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trips It's Been," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 55-218.
    14. Joe Peek & Eric S. Rosengren, 1997. "Collateral damage: effects of the Japanese real estate collapse on credit availability and real activity in the United States," Working Papers 97-5, Federal Reserve Bank of Boston.
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