Risk-Taking and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms

Using confidential regulatory firm-bank-loan level data from the U.S., we document four new facts about the credit market. First, private SMEs typically utilize all available bank credit which comprises their entire balance sheet debt, compared to large listed firms who can switch between corporate bonds and drawing from credit lines. Second, SMEs borrow shorter maturity and pay higher interest rates relative to large publicly listed firms. Third, SMEs more frequently use future claims to their enterprise value as collateral rather than physical assets and real estate that can be liquidated upon default. Fourth, the relation between collateral and risk—where risk is measured by the loan spread—is positive for large listed firms but negative for SMEs. Motivated by these facts, we investigate the transmission of monetary policy and risk-taking behavior. We show that, when monetary policy is expansionary, banks do not lend differently to risky and non-risky firms, whether they are private SMEs or publicly listed firms. Instead, risk-taking is driven by credit demand since SMEs who lack collateral in terms of physical assets increase their leverage due to low interest rates, which increases their ability to payback the loan. Since SMEs cover 99 percent of all U.S. firms and over 50 percent of U.S. employment and output, our results have important implications for the aggregate boom-bust cycles in a low interest rate environment.