Key Drivers of Bank Credit Availability to Small Business in the United States: 1995-2014

Abstract

Representing a majority of private sector jobs and more than onehalf of GDP, small business is vital to the U.S. economy. Access to credit is one of its most fundamental issues. Although U.S. banks have continued to increase total lending, the share of bank loans ($) to small business continuously declined from 40% in 1995 to 31% in 2009 and further declined rapidly following the Financial Crisis to 23% by the end of 2014. Based on historical trend lines there is an estimated $300 billion lending “gap” to small business in 2014. This study identifies the key drivers of credit availability to small business in the U.S. from 1995 to 2014 by analyzing both demand and supply side factors. The study includes over 100,000 individual bank observations, 10 dependent and 20 independent variables. To address collinearity of many of the variables, the analysis includes both multiple and single variable regression models. This study finds that the factors with greatest positive impact on credit availability to small business (both number and loan amount ($)) are macroeconomic and demand factors. To a somewhat lesser degree, increased bank capital requirements as measured by tangible equity ratio (negative) and bank loan profitability as measured by net interest margin or NIM (positive) also have a significant impact. In multiple variable regressions, a one percent change in GDP yields a 4.11% change in the number of loans issued and a 2.37% change in the dollar amount of loans. A one percent change in tangible equity ratio yields a – 0.07% change in the number of small business loans and a – 0.05% change in the dollar amount of loans. Single variable regressions corroborate these results. Single variable results identify additional significant factors including CPI, GDP/capita, unemployment rate, interest rates, population and number of small businesses. Single variable results also show a positive significant impact on both number and amount of small business loans from bank loan profitability as measured by NIM. The findings of this study suggest that focusing on pro-growth economic policies, coupled with stable monetary policies and normalized interest rates will have the greatest positive impact on credit availability to small business. Bank regulators must carefully balance the costs and benefits of increased bank capital requirements.