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From Housing Bust to Credit Crunch: Evidence from Small Business Loans

This paper provides evidence that the recent housing bust in the United States precipitated a “credit crunch” for small businesses. Using detailed records of individual bank’s lending history, we develop a measure of their exposure to the housing bust. This measure is then used to estimate the impact of a drop in house prices on the supply of loans. Specifically, we compare the lending behavior of banks in the same metropolitan areas, and find that those that originated more of their mortgage loans in depressed housing markets elsewhere reduced local small business lending more substantially. We find the effect to be greater for banks with more than $10bn in assets. Overall, our estimates suggest that the fall in house prices accounted for one third of the decline in small business loans originated by major banks from 2007 to 2009.

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Paper provided by University of Alberta, Department of Economics in its series Working Papers with number 2011-15.

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Length: 38 pages
Date of creation: 01 Oct 2011
Date of revision: 01 Jan 2015
Handle: RePEc:ris:albaec:2011_015
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  1. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
  2. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
  3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  4. Joe Peek & Eric Rosengren, 1993. "The Capital Crunch: Neither A Borrower Nor A Lender Be," Boston College Working Papers in Economics 243, Boston College Department of Economics.
  5. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
  6. W. Scott Frame & Michael Padhi & Lynn W. Woosley, 2001. "The effect of credit scoring on small business lending in low- and moderate-income areas," FRB Atlanta Working Paper 2001-6, Federal Reserve Bank of Atlanta.
  7. Strahan, Philip E. & Weston, James P., 1998. "Small business lending and the changing structure of the banking industry1," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 821-845, August.
  8. Berger, Allen N & Frame, W Scott & Miller, Nathan H, 2005. "Credit Scoring and the Availability, Price, and Risk of Small Business Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 191-222, April.
  9. Robert B. Avery & Kenneth P. Brevoort & Glenn B. Canner, 2007. "Opportunities and Issues in Using HMDA Data," Journal of Real Estate Research, American Real Estate Society, vol. 29(4), pages 351-380.
  10. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
  11. Allen N. Berger & Leora Klapper & Gregory F. Udell, 2001. "The ability of banks to lend to informationally opaque small businesses," Finance and Economics Discussion Series 2001-34, Board of Governors of the Federal Reserve System (U.S.).
  12. Hans Degryse & Partick Van cayseele, 1998. "Relationship Lending within a Bank-based System: Evidence from European Small Business Data," Working Papers Department of Economics ces9816, KU Leuven, Faculty of Economics and Business, Department of Economics.
  13. Paul S. Willen & Adam Hale Shapiro & Kristopher Gerardi, 2008. "Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures," 2008 Meeting Papers 345, Society for Economic Dynamics.
  14. Mark A. Carlson & Hui Shan & Missaka Warusawitharana, 2011. "Capital ratios and bank lending: a matched bank approach," Finance and Economics Discussion Series 2011-34, Board of Governors of the Federal Reserve System (U.S.).
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