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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.

Suggested Citation

  • Joe Peek & Eric S. Rosengren, 1995. "Banks and the availability of small business loans," Working Papers 95-1, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:95-1
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    References listed on IDEAS

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    1. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June.
    2. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 309-340.
    3. 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.
    4. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-439, May.
    10. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, 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. 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 247-266, March.
    13. 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.
    14. Diana Hancock & James A. Wilcox, 1992. "The effect on bank assets of business conditions and capital shortfalls," Proceedings 373, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Gilbert, R. Alton & Vaughan, Mark D., 2001. "Do depositors care about enforcement actions?," Journal of Economics and Business, Elsevier, vol. 53(2-3), pages 283-311.
    2. Peek, Joe & Rosengren, Eric S, 1997. "The International Transmission of Financial Shocks: The Case of Japan," American Economic Review, American Economic Association, vol. 87(4), pages 495-505, September.
    3. 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.
    4. 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.
    5. Joe Peek & Eric S. Rosengren, 1996. "Will Legislated Early Intervention Prevent the Next Banking Crisis?," Boston College Working Papers in Economics 359, Boston College Department of Economics.
    6. 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.
    7. Cardone Riportella, Clara & Casasola, María José & Samartín Sáenz, Margarita, 2005. "Do banking relationships improve credit conditions for Spanish SMEs?," DEE - Working Papers. Business Economics. WB wb052806, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    8. 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.
    9. Joe Peek & Eric Rosengren, 1997. "Derivatives Activity at Troubled Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 287-302, October.
    10. Cardone Riportella, Clara & Longarela, Iñaki R. & Camino Blasco, David, 1998. "Capital market inefficiencies, credit rationing and lending relationship in SME's," DEE - Working Papers. Business Economics. WB 6546, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    11. 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.
    12. Stanton, Sonya Williams, 1998. "The Underinvestment Problem and Patterns in Bank Lending," Journal of Financial Intermediation, Elsevier, vol. 7(3), pages 293-326, July.
    13. Joe Peek & Eric S. Rosengren, 1996. "Bank Regulatory Agreements and Real Estate Lending," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(1), pages 55-73.
    14. 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.

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    Keywords

    Bank loans ; Small business;

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