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

77 Pages Posted: 19 Apr 2012  

Judit Montoriol-Garriga

La Caixa

J. Christina Wang

Federal Reserve Bank of Boston

Date Written: April 19, 2012

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.

Keywords: small business lending, credit rationing, recession

JEL Classification: G21, G01, G32, E51

Suggested Citation

Montoriol-Garriga, Judit and Wang, J. Christina, Rationing of Bank Credit to Small Businesses: Evidence from the Great Recession (April 19, 2012). Available at SSRN: https://ssrn.com/abstract=2042584 or http://dx.doi.org/10.2139/ssrn.2042584

Judit Montoriol-Garriga (Contact Author)

La Caixa ( email )

Av Diagonal 629
Barcelona, 08028
Spain

J. Christina Wang

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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