November 2012 No. 399
How Did the Financial Crisis Affect
Small Business Lending in the United States?
By Rebel A. Cole, DePaul University, Chicago, Illinois.
56 pages. Under contract number SBAHQ-10-M-0208.
Small businesses are a source of economic strength
to the nation; they provide economic opportunities to
diverse groups of people and bring innovative products
and services to the marketplace. As an economic
engine, they typically create new jobs, but since the
housing bubble burst during 2007-2008 they have
struggled to maintain their foothold. Their success
depends upon their access to credit, and they rely
heavily on depository institutions for their financial
needs. Lax underwriting standards saddled U.S.
banks, large and small, with levels of nonperforming
loans not seen since the banking crisis of the
late 1980s. Anecdotal evidence suggested that small
businesses, which largely rely upon banks for credit,
were especially hard hit. The purpose of this study
is to understand how bank credit, in general, and
bank credit to small businesses, in particular, were
affected by the financial crisis. This study is part of
an evolving discussion among researchers and policymakers.
It is one perspective on the issue, and others
may have additional views and findings.
The report shows that the decline in bank lending
was far more severe for small businesses than for
larger firms. Bank lending to small firms rose from
$308 billion in June 1994 to a peak of $659 billion
in June 2008 but then declined by almost 18 percent
to only $543 billion in June 2011. Bank lending to
all firms rose from $758 billion in 1994 to a peak
of $2.14 trillion in June 2008 and then declined by
about 9 percent to $1.96 trillion as of June 2011.
• The analysis showed a significant positive
relation between a bank’s level of capitalization
and business lending, especially lending to small
business. In other words, the report supports the
position that higher capital standards would improve
the availability of credit to U.S. firms, especially to
small firms, and it refutes banking industry claims
that higher capital standards would reduce business
lending and hurt the economy.
• The research showed a significant negative
correlation between bank profitability and business
lending. Unprofitable banks tended to increase their
lending and their risk exposure so as to exploit the
subsidy from their deposit insurance.
• The author compared business lending by
banks that received TARP funds (Troubled Assets
Relief Program) and those that did not, and found
that the decline in bank lending was far more severe
to small businesses than to larger firms. For example
total commercial & industrial (C&I) lending declined
by 18 percent for large firms versus 20 percent for
small firms. Among banks participating in TARP,
the decline was even greater; small C&I lending
declined by 31 percent and only 10 percent at non-
TARP banks over the 2008–2011 period.
• Small business loans from banks receiving
TARP funds grew more slowly than those from non-
TARP banks (7.0 percent vs. 8.4 percent) and their
allocation of assets to small business loans actually
decreased by 1.9 percent, while those of non-TARP
banks increased by 1.9 percent.
• Bank size had a significant negative effect on
• The study found a significant positive relation
between young banks (less than five years old or
“de novo”) and business lending. This new evidence
complements existing studies of lending by de novo
banks and suggests that regulators should enact
policies to encourage the formation of new banks as
a way to increase business lending.
Scope and Methodology
The 2007 Survey of Business
Owners (SBO) and the 1996-2010 Current Population
Survey (CPS) are the two sources of data that enabled
this study. The analysis of immigrant business finances
would not have been possible without the data from the
2007 SBO. Logit regressions are used to determine the
probability of entrepreneurship.
Both univariate and multivariate tests were
used to show how the financial crisis affected bank
lending to small businesses. The study utilizes a
fixed-effects regression model that exploits the
panel nature of the dataset to explain three different
measures of small business lending, which were: (1)
change in value of small business loans, (2) change
in the ratio of small business loans to total assets (3)
and the natural logarithm of the dollar value of small
business loans. Several control variables were used,
including financial health variables (asset quality,
earnings, total equity), bank size, and amount of
This report was peer-reviewed consistent with
Advocacy’s data quality guidelines. More information
on this process can be obtained by contacting
the director of economic research by email at
firstname.lastname@example.org or by phone at (202) 205-6533.
This report is available on the Office of Advocacy’s
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This report was developed under a contract with the
Small Business Administration, Office of Advocacy,
and contains information and analysis that was reviewed
and edited by officials of the Office of Advocacy.
However, the final conclusions of the report do not
necessarily reflect the views of the Office of Advocacy.