How Did Bank Lending to Small Business in the United States Fare After the Financial Crisis?

Rebel A. Cole, January 2018

Since the financial crisis, researchers have examined the health of the small business credit market. Bank credit is the form of credit most commonly used by small businesses, and it contracted sharply during the financial crisis years of 2009-2011. Building upon previous literature, this study is a follow-up to the author’s 2012 study. That research analyzed the financial crisis and time period preceding it, and it demonstrated that the decline in bank lending was much more acute for small businesses than for larger firms during the crisis.

This study, analyzing the time period after the financial crisis, assesses changes in bank credit to small businesses and to all businesses to determine whether bank lending to small businesses recovered to pre-crisis levels after the crisis. The study also tests whether there were significant differences in the lending behavior of large vs. small banks and of troubled vs. healthy banks. The decline in the number of banks—including the drop in community banks—during and after the crisis makes it difficult to determine if banks have continued the tight-credit policies of 2009–2011, or if they have eased them. The study defines small business loans as loans of $1 million or less as reported in the data from the FFIEC. The information available does not make it possible to distinguish SBA-guaranteed loans.

Overall Findings

Prior to the financial crisis, both small business loans and total business loans grew at double-digit rates, but small business loans grew only about half as fast at large banks as at small banks (Figure 1). Loan growth was greater for small business loans prior to the crisis, and the decline in lending was greater for small business loans during and after the crisis. (Figure 2)

• New originations of business loans declined abruptly during the crisis years, but more so at large banks than at small banks (Figure 3). Post-crisis, small business lending grew much faster at small banks than at large banks while total business lending grew much faster at large banks than at small banks.
• Before the crisis, growth in business lending by troubled banks averaged only 3 percent per year as compared to 15 percent at healthy banks. Both total and small business lending contracted at troubled banks by more than 5 percent per year during the crisis years, but continued to expand at healthy banks by more than 5 percent per year. Post-crisis, small business lending by troubled banks remained weak, averaging growth of only about 2 percent per year while total business lending grew by 4 percent per year.
• Univariate results for the amounts and numbers of small business loan originations paint a very similar picture. The amount of small business loan originations plummeted by more than half during the crisis and has seen only a very limited recovery post-crisis, leaving small business loan originations down 40 percent from pre-crisis levels. The total number of originations fell by almost three-quarters during the financial crisis; it has recovered during the post-crisis years but remains substantially below pre-crisis levels. The decline in the number of originations during the financial crisis years was much more pronounced at large banks than at small banks but so has been the recovery.
• The univariate results also show the decline in small business loan originations and outstanding balances has been sharper at large banks and troubled banks. Figure 4 shows the percentage change in the dollar amount of small business lending outstanding at healthy and troubled banks.
• Multivariate analysis of both outstanding loan amounts and loan originations largely confirms the univariate results. Hence, it appears that there has been little in the way of a recovery in the small business loan market, but a somewhat more robust recovery in the market for total business loans.