Post-Crisis Small Business Bank Lending at a Slow Crawl

A recent report from the U.S. Small Business Administration (SBA)’s Office of Advocacy assesses changes in bank lending to small businesses in comparison to levels during the financial crisis. Following a review of banks of varying sizes and financial health, findings reveal a slow recovery in the small business loan market and a more pronounced growth in the total business loan market.

The purpose of the report was to see if there have been post-crisis improvements in lending to small businesses since the decline in bank credit that occurred during 2009-2011. It found prominent differences in lending behaviors between large and small banks, and financially troubled and healthy banks.

Here are some of the report’s key findings.

• Small businesses experienced the greatest decline in loan growth: While loans to the small business market were greater pre-crisis, they suffered the biggest decline in bank lending during and after the financial crisis.
• Small business lending grew faster at small banks: Small banks gave out loans to small businesses at a faster rate than larger banks. At the same time, lending to total businesses grew faster at large banks than small banks.
• Troubled banks were weaker in small business lending: Perhaps unsurprisingly, banks with poor financial health had a slower growth in lending to small businesses than banks with more robust health. While both types were affected during the crisis—with small business lending contracting by more than 5 percent for both—healthy banks had a greater expansion by more than 5 percent.
• Loan originations at 40 percent from pre-crisis levels: There has been miniscule recovery since small business loan originations plummeted by half during the crisis, as the total number remains well below pre-crisis levels. Large banks experienced both a greater decline in total small business loan originations and a greater recovery, compared to smaller banks.

All these findings point to an overall trend: there has been a slow recovery in the small business loan market, while the total business market has had a comparatively greater recovery in bank lending. How do we boost recovery in bank lending to small businesses, an important contributor to the nation’s economy?

The report offers some policy recommendations, such as encouraging small business lending at large banks; increasing the formation of new community banks; reducing regulatory burdens on small banks; support non-bank lending to small businesses; and helping troubled banks recover with banking sector reforms.

To read the full report, click here.