From Housing Bust to Credit Crunch: Evidence from Small Business Loans

Abstract

This paper provides evidence that the recent housing bust in the United States precipitated a “credit crunch” for small businesses. We compare banks’ small business lending in the same metropolitan areas, and find that those that originated or purchased more of their mortgage loans in depressed housing markets elsewhere reduced local lending more substantially. The findings suggest a substantial spill-over effect across sectors and geographical areas. The effect is greater for banks with more than $10bn in assets. Overall, the fall in house prices accounted for one third of the decline in small business loans originated by major banks in the U.S. from 2007 to 2009.