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Supervisor Ratings and the Contraction of Bank Lending to Small Businesses
Elizabeth K. Kiser (au); Robin A. Prager (au); Jason R. Scott (au)
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 study 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 their sample to small banks (those with total assets of $5 billion or less), the authors 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. They 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. The authors 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. Figures and tables. This is a print on demand report.
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