Working Paper

Did High Leverage Render Small Businesses Vulnerable to the COVID-19 Shock?

Abstract: Using supervisory data on small and mid-sized nonfinancial enterprises (SMEs), we find that those SMEs with higher leverage faced tighter constraints in accessing bank credit after the COVID-19 outbreak in spring 2020. Specifically, SMEs with higher pre-COVID leverage obtained a smaller volume of new loans and had to pay a higher spread on them during the pandemic period. Consistent with an inward shift in loan supply, these effects were concentrated in loans originated by banks with below-median capital buffers. Highly levered SMEs that relied on low-capital large banks for funding before the pandemic were not able to substitute to other sources of debt financing and thus experienced more of a reduction in total debt as well as a decline in investment and employment. On the other hand, the unprecedented public support, especially the Paycheck Protection Program (PPP), mitigated the adverse real effect stemming from bank credit constraints.

Keywords: leverage; small business; credit supply; bank capital; COVID-19;

JEL Classification: G21; G28; G32;

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Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 2022-07-01

Number: 22-13