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
Date Written: January 25, 2015
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: Suggested Citation