FAU Study Finds Bank Lending to Small Businesses Still Depressed Several Years After Financial Crisis Ended

BOCA RATON, Fla., Jan. 23, 2018 /PRNewswire-USNewswire/ -- Bank lending to small businesses, a major contributor to local economies and job creation around the country, is still depressed several years after the end of the U.S. financial crisis that started in 2008, according to a new study by faculty at Florida Atlantic University College of Business.

The research study, published by the U.S. Small Business Administration, is the first rigorous analysis of how recovery from the financial crisis affected bank lending to small U.S. businesses. It provides new insights into whether or not the small-business credit market has shared in the recovery, and, if not, how to tailor legislation, regulations and taxes to help small businesses obtain needed credit.

"There's been a very small recovery in lending to small businesses," said Rebel Cole, Ph.D., author of the study and the Kaye Family Endowed Professor in Finance at FAU. "The repercussions of this are huge. Small businesses account for about half of all private sector employment."

Following the crisis, small-business lending has remained weak, growing at only about 2 percent per year while total-business lending expanded at twice that rate. 

The decline in small-business loan originations has been much sharper at large banks rather than at small banks and at troubled banks rather than at healthy banks.

The study indicates troubled banks severely curtail their business lending, especially to small businesses, which adversely affects the economy. According to Cole, this implies troubled banks should be resolved more quickly than in the past so that their assets are passed on to healthy banks that can resume lending to small businesses.

The study found that large banks lent a smaller portion of their assets to small businesses than did small banks, and that large banks also severely curtailed their small-business lending following onset of the financial crisis. Post-crisis lending has disproportionately gone to large businesses.

Cole said regulators could use existing laws, such as the Community Reinvestment Act, to encourage more small-business lending by these very large banks, and legislators could pass legislation to limit the concentration of banking sector assets in the hands of a few large players. The study's evidence also supports proposals by U.S. banking regulators to raise minimum capital ratios to levels where they are binding constraints for large banks.

SOURCE Florida Atlantic University College of Business

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