Stress Tests and Small Business Lending

Cortes, Kristle Romero; Demyanyk, Yuliya; Li, Lei; Loutskina, Elena; Strahan, Philip E.

doi:10.26509/frbc-wp-201802

Working Paper

Stress Tests and Small Business Lending

Abstract: Post-crisis stress tests have altered banks? credit supply to small business. Banks affected by stress tests reduce credit supply and raise interest rates on small business loans. Banks price the implied increase in capital requirements from stress tests where they have local knowledge, and exit markets where they do not, as quantities fall most in markets where stress-tested banks do not own branches near borrowers, and prices rise mainly where they do. These reductions in supply are concentrated among risky borrowers. Stress tests do not, however, reduce aggregate credit. Small banks increase their share in geographies formerly reliant on stress-tested lenders.

Keywords: small business lending; stress tests; credit supply; large banks; ;

JEL Classification: G2;

https://doi.org/10.26509/frbc-wp-201802