Rationing of Bank Credit to Small Businesses: Evidence from the Great Recession

Abstract:     
We develop a model of bank lending that allows for credit rationing in equilibrium. Recognizing that small firms incur a higher percentage cost of monitoring than large firms, the model shows that the incidence of bank credit rationing rises more for small firms than for large firms during economic downturns. Increased rationing of small firms manifests among loans actually made as a relative decline in spreads paid by small borrowers, especially the riskiest ones and those borrowing from poorly capitalized banks. Empirical estimations using loan-level data from the United States find evidence consistent with a pattern of a differentially greater degree of rationing of credit to small borrowers during the Great Recession.

Number of Pages in PDF File: 77

Keywords: small business lending, credit rationing, recession

JEL Classification: G21, G01, G32, E51

working papers series