In this paper, we ask whether such a credit gap did in fact open up in the post-crisis period, and what its economic implications may have been. Our point of departure, and the basis for our empirical strategy, are shown in Figure 1, which plots Community Reinvestment Act (CRA) data on small business loan originations in U.S. banks.
While small business lending declined at all banks beginning in 2008, the four largest banks— 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 annual flow 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 contraction in credit supply. A natural alternative is that there was a differential shift in 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-country 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 explanation for the differential decline in lending at the Top 4 banks.