Supervisor Ratings and the Contraction of Bank Lending to Small Businesses

34 Pages Posted: 27 Dec 2012

See all articles by Elizabeth K. Kiser

Elizabeth K. Kiser

Board of Governors of the Federal Reserve System

Robin A. Prager

Board of Governors of the Federal Reserve System

Jason Scott

Independent

Date Written: August 23, 2012

Abstract

Bank lending to small firms in the U.S. fell substantially during the recent financial crisis and the ensuing recession. Because small firms account for a disproportionate share of new job creation, lending to these firms could have important implications for the pace of economic recovery. A number of factors may have contributed to the decline in small business lending over this period. This paper examines the extent to which changes in banks' supervisory ratings are associated with changes in the rate of growth of their lending to small businesses. Limiting our sample to small banks (those with total assets of $5 billion or less), we estimate the relationship between changes in supervisory CAMELS ratings and changes in small commercial and industrial (C&I) or small commercial real estate (CRE) loans to businesses, between 2007 and 2010. Controlling for other relevant factors, including several balance sheet measures of bank health, we find that small banks that experienced ratings downgrades during 2007-2010 exhibited significantly lower rates of growth in small C&I loans and small CRE loans outstanding compared with banks that maintained their ratings at healthy levels during the same period. We also find evidence suggesting that the slower growth in small business lending at downgraded banks is attributable primarily to aspects of the banks' financial health that were not fully reflected in balance sheet data, rather than to the ratings downgrades themselves or the supervisory process surrounding the downgrades.

Keywords: Bank ratings, CAMELS ratings, supervisory ratings, bank lending, small business lending, small business finances, financial crisis

JEL Classification: G21, G18, G30

Suggested Citation

Kiser, Elizabeth K. and Prager, Robin and Scott, Jason, Supervisor Ratings and the Contraction of Bank Lending to Small Businesses (August 23, 2012). FEDS Working Paper No. 2012-59, Journal of Financial Services Research, Vol. 50, No. 2, pp. 163-186, 2016, Available at SSRN: https://ssrn.com/abstract=2194037 or http://dx.doi.org/10.2139/ssrn.2194037

Elizabeth K. Kiser (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Robin Prager

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-3643 (Phone)
202-452-3819 (Fax)

Jason Scott

Independent

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