Large banks and small firm lending |
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| Affiliation: | 1. Federal Reserve Board, United States;2. Harvard University and NBER, United States;3. Acadian Asset Management, United States;1. Harvard University, Cambridge, MA 02138, USA;2. The American Enterprise Institute, Washington, DC, USA;3. Ministry of Economy Trade and Industry, Tokyo, Japan and RIETI;1. Department of Finance, University of Illinois Urbana-Champaign, United States;2. Department of Finance, Erasmus University Rotterdam, Netherlands;1. Seoul National University, South Korea;2. Research Group, Federal Reserve Bank of New York, USA;3. Department of Economics, Koç University, Istanbul, Turkey;1. Federal Reserve Board, Division of Monetary Affairs, Board of Governors of the Federal Reserve System, USA;2. Robert Day School of Economics and Finance, Claremont McKenna College, USA;1. Finance area, INSEAD, 1 Ayer Rajah Avenue, Singapore 138676;2. University of Vienna, Oskar-Morgenstern-Platz 1, Wien 1090, Austria |
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| Abstract: | We examine the long-lasting effects of the 2007 real estate price collapse on small business credit supply. Banks affected by the decline in real estate prices systematically contracted their credit to small firms. At the same time, regional and local banks, many of which were unaffected by the initial shock, increased small business lending to nearby borrowers and opportunistically expanded their branch networks, making gains in market share that persisted for the following decade. Although the net effect of the contraction in credit was negative, we show that opportunistic expansion tied to permanent market changes is an important offsetting force that dampened the negative effect on small firms during the GFC and its aftermath. |
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