The Role of Regulation and Bank Competition in Small Firm Financing: Evidence from the Community Reinvestment Act
49 Pages Posted: 18 Feb 2022
There are 2 versions of this paper
The Role of Regulation and Bank Competition in Small Firm Financing: Evidence from the Community Reinvestment Act
Date Written: February 1, 2022
Abstract
This paper analyzes how bank regulation that promotes greater access to credit impacts the financing of targeted small firms. It develops a model where banks compete with trade creditors to fund small firms and applies it to study the effects of the Community Reinvestment Act (CRA). The empirical tests reveal that a CRA-induced increase in bank loans reduces small firms’ use of relatively expensive trade credit. The effect is more profound in low- and medium-income areas where financial constraints are tighter due to low bank competition. The effect is also larger for small firms that operate in trade credit-dependent industries.
Keywords: Competition, Regulation, Trade credit, Small business loans
JEL Classification: G14, G21, L13, L50, L49
Suggested Citation: Suggested Citation