#07-22
The Repercussions on Small Banks and Small Businesses of Bank Capital and Loan Guarantees
Diana Hancock, Joe Peek, and James A. Wilcox
Abstract: Small businesses rely on banks for credit more than do large businesses. As a result,
small businesses may be more adversely affected when adverse shocks, such as reduced
bank capital or higher interest rates, reduce the supply of bank loans. We use annual, statelevel
data for 1990-2000 to estimate: (1) how much lower bank capital and higher interest
rates affected businesses of various sizes, (2) how much SBA-guaranteed loans cushioned
small businesses in particular and the economy more generally, and (3) whether the effects
were larger during recessions and when interest rates were high.
Lower bank capital and higher interest rates reduced bank lending, economic growth,
employment, and payrolls at businesses of all sizes. Furthermore, lower bank capital at
small banks impinged more on small businesses than on large businesses. The results also
provide strong, but not conclusive, evidence that SBA-guaranteed loans raised economic
growth rates, employment, wages and salaries, and nonfarm proprietors’ incomes. SBA-guaranteed
loans were less procyclical and less affected by capital pressures on banks than
were non-guaranteed loans. As a result, SBA guarantees tended to stabilize the economy,
apparently by partially offsetting the reductions in banks’ lending due to recessions and
bank capital pressures. In addition, when economic growth was slower or interest rates
were higher, the effects on small businesses of a given change in bank capital, loan
delinquencies, and SBA-guaranteed loans were larger.
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