The Repercussions on Small Banks and Small Businesses of Procyclical Bank Capital and Countercyclical Loan Guarantees
45 Pages Posted: 17 Mar 2007
Date Written: March 2007
Small businesses rely on banks for credit more than large businesses do. As a result, small business may be more adversely affected when adverse shocks, such as reduced bank capital or higher interest rates, reduce the supply of bank loans. We use annual, state-level data for 1990-2000 to estimate: (1) how much lower bank capital and higher interest rates affected businesses of various sizes, (2) how much SBA-guaranteed loans cushioned small business in particular and the economy more generally, and (3) whether the effects were larger during recessions and when interest rates were high.
Lower bank capital and higher interest rates reduced bank lending, economic growth, employment, and payrolls at businesses of all sizes. Furthermore, lower bank capital at small banks impinged more on small business than on large business. The results also provided some weak evidence that SBA-guaranteed loans raised economic growth rates, employment, wages and salaries, and non-farm proprietors' incomes. SBA-guaranteed loans were less procyclical and less affected by capital pressures on banks than were non-guaranteed loans. As a result, SBA programs tended to stabilize the economy by offsetting the effects of recessions and bank capital pressures. When economic growth was slow or interest rates were high, the effects on small business of per unit change in bank capital, loan delinquencies, and SBA-guaranteed loans were larger.
Keywords: small business, bank capital, loan guarantee
JEL Classification: G2, G21
Suggested Citation: Suggested Citation