The Role of Regulation and Bank Competition in Small Firm Financing: Evidence from the Community Reinvestment Act

Avramidis, Panagiotis; Pennacchi, George; Serfes, Konstantinos; Wu, Kejia

doi:10.21799/frbp.wp.2022.06

Working Paper

The Role of Regulation and Bank Competition in Small Firm Financing: Evidence from the Community Reinvestment Act

Abstract: This paper analyzes how bank regulation that promotes greater access to credit impacts the financing of targeted small firms. It develops a model where banks compete with trade creditors to fund small firms and applies it to study the effects of the Community Reinvestment Act (CRA). The empirical tests reveal that a CRA-induced increase in bank loans reduces small firms’ use of relatively expensive trade credit. The effect is more profound in low- and medium-income areas where financial constraints are tighter due to low bank competition. The effect is also larger for small firms that operate in trade credit-dependent industries.

Keywords: Competition; Regulation; Trade credit; Small business loans;

JEL Classification: G14; G21; L13; L50; L49;

https://doi.org/10.21799/frbp.wp.2022.06