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The Decline of Big-Bank Lending to Small Business 2017

The Decline of Big-Bank Lending to Small Business

The above quote from Karen Mills, the former head of the U.S. Small Business Administration, captures a concern expressed by many observers during the slow recovery from the 2007–2009 financial crisisand Great Recession: the possible existence of a small business “credit gap”—i.e., a reduction in the supply of creditto small firms.

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In this paper, we ask whether such a credit gapdid in fact open up in the post-crisis period, and what its economic implications mayhave been. Our point of departure, and the basis for our empirical strategy, is shown in Figure 1, which plots Community Reinvestment Act (CRA) data on small business loan originationsby U.S. banks.

While small business lending declined at all banks beginning in 2008, the four largestbanks— those owned by Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo—cut back significantly relative to the rest of the banking sector. By the trough in 2010, the annualflow of originations from the Top 4 banks stood at just 41% of its 2006 level, whereas the comparable figure for all other banks was 66%. Moreover, originations at the Top 4 banks remained depressed after2010, hovering at roughly50% of their pre-crisis level through 2014. By contrast, lending at other banks slowly recovered, approaching 80% of its pre-crisis level by 2014.

We begin by arguing that this differential decline in small business lending at the Top 4 banks reflects a differential contractionin creditsupply. Anatural alternative is that there was a differential shiftin credit demand, perhaps because the Top 4 were disproportionately located in areas that were hardest hit by the Great Recession. UsingCRA data at the bank-county level, we compare the small business loan growth of the Top 4 banks in a given county to other banks operating in the same county, thus sweeping away any local variation in loan demand.

If anything, these within-county differences are slightly larger in absolute magnitude than the raw across-bank differences depicted in Figure 1, which is consistent with a supply-side rather than demand-side explanationfor the differential declinein lending at the Top 4 banks.

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