Stress Tests and Small Business Lending
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.
The views expressed are those of the authors and do not necessarily reflect the official positions of the Federal Reserve Bank of Cleveland, the Federal Reserve System, or the National Bureau of Economic Research. We thank seminar participants at the Chinese University of Hong Kong, Duke University (Fuqua), the Federal Reserve Banks of Cleveland and New York, the Federal Reserve Board of Governors, Frankfurt School of Business, Hong Kong University, Kentucky University, and the University of New South Wales.