Stress Tests and Small Business Lending

54 Pages Posted: 8 Mar 2018 Last revised: 20 Dec 2018

See all articles by Kristle Romero Cortés

Kristle Romero Cortés

UNSW Australia Business School, School of Banking and Finance

Yuliya S. Demyanyk

University of Illinois at Chicago

Lei Li

Federal Reserve Board

Elena Loutskina

University of Virginia - Darden School of Business

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 17, 2018

Abstract

Post-crisis stress tests have altered banks’ credit supply to small business. Banks most affected
by stress tests reallocate credit away from riskier markets and toward safer ones. They also raise
interest rates on small loans. Quantities fall most in high-risk markets where stress-tested banks
own no branches, and prices rise mainly where they do. The results suggest that banks price the
stress-test induced increase in capital requirements where they have local knowledge, and exit
where they do not. Stress tests do not, however, reduce aggregate credit. Small banks seem to
increase their share in geographies formerly reliant on stress-tested lenders.

Keywords: small business lending, stress test, credit supply, large banks

JEL Classification: G2

Suggested Citation

Cortés, Kristle Romero and Demyanyk, Yuliya S. and Li, Lei and Loutskina, Elena and Strahan, Philip E., Stress Tests and Small Business Lending (December 17, 2018). Darden Business School Working Paper No. 3129108. Available at SSRN: https://ssrn.com/abstract=3129108 or http://dx.doi.org/10.2139/ssrn.3129108

Kristle Romero Cortés

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Yuliya S. Demyanyk

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Lei Li

Federal Reserve Board ( email )

1801 K Street NW
Washington, DC 20036
United States

Elena Loutskina (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-4031 (Phone)

Philip E. Strahan

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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