“Where are the Large Banks? Stress Tests and Small Business Lending” by Philip Strahan
Bank small business lending dropped after the 2008 Financial Crisis and has seen very slow recovery, barely reaching 2001 levels. We show that post-crisis stress tests help explain this lack of recovery. Banks affected more by stress tests raise prices on small business loans and reduce quantity. The supply reduction affects risky, but not safe, small business loans. The price increases are concentrated in geographies where banks have branches, but the declines in quantities are concentrated where they do not. Banks price the implied increase in capital requirements from stress tests where they have local knowledge, and they exit markets where they do not.