Risk Overhang and Loan Portfolio Decisions: Small Business Loan Supply Before and During the Financial Crisis

74 Pages Posted: 7 Sep 2012 Last revised: 29 Mar 2015

See all articles by Robert DeYoung

Robert DeYoung

University of Kansas School of Business

Anne Gron

NERA Economic Consulting

Gokhan Torna

SUNY at Stony Brook University - College of Business

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: January 25, 2015

Abstract

We estimate a structural model of bank portfolio lending and find that the typical U.S. community bank reduced its business lending during the global financial crisis. The decline in business credit was driven by increased risk overhang effects (consistent with a reduction in the liquidity of assets held on bank balance sheets) and by reduced loan supply elasticities suggestive of credit rationing (consistent with an increase in lender risk aversion). Nevertheless, we identify a cadre of strategically focused relationship banks that made and maintained higher levels of business loans during the crisis.

Keywords: Portfolio Lending, risk overhang, small business lending

JEL Classification: G21, G28, G31

Suggested Citation

DeYoung, Robert and Gron, Anne and Torna, Gokhan and Winton, Andrew, Risk Overhang and Loan Portfolio Decisions: Small Business Loan Supply Before and During the Financial Crisis (January 25, 2015). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2140952 or http://dx.doi.org/10.2139/ssrn.2140952

Robert DeYoung (Contact Author)

University of Kansas School of Business ( email )

Summerfield Hall
1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-1806 (Phone)

Anne Gron

NERA Economic Consulting ( email )

One Main Street, 5th Floor
Cambridge, MA 02142
United States

Gokhan Torna

SUNY at Stony Brook University - College of Business ( email )

250 Harriman Hall
Stony Brook, NY 11777
United States
631-632-5304 (Phone)
631-632-9412 (Fax)

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
Department of Finance
Minneapolis, MN 55455
United States
612-624-0589 (Phone)
612-626-1335 (Fax)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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