University of Kansas
School of Business
1654 Naismith Drive
Lawrence, KS 66045
NBER Working Papers and Publications
|March 2018||Stress Tests and Small Business Lending|
with Kristle Cortés, Yuliya Demyanyk, Elena Loutskina, Philip E. Strahan: w24365
Post-crisis stress tests have altered banks’ credit supply to small business. Banks affected by stress tests reduce credit supply and raise interest rates on small business loans. Banks price the implied increase in capital requirements from stress tests where they have local knowledge, and exit markets where they do not, as quantities fall most in markets where stress-tested banks do not own branches near borrowers, and prices rise mainly where they do. These reductions in supply are concentrated among risky borrowers. Stress tests do not, however, reduce aggregate credit. Small banks increase their share in geographies formerly reliant on stress-tested lenders.