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Can the supply of small business loans be increased?

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  • Jon Christensson
  • Jim Wilkinson

Abstract

Small and new businesses, widely credited as engines for job growth, have struggled during the recovery. One reason, say some analysts, is that bank lending to small businesses has declined steadily since the start of the recession. If, as many small businesses claim, the supply of credit from banks has contracted, then increasing the supply of small business loans may allow these businesses to grow and create new jobs. Understanding the factors that affect loan supply may help policymakers design policies to increase the supply of small business loans and, therefore, support further job growth. ; Wilkinson and Christensson analyze the potential effectiveness of two strategies that policymakers can use to expand the supply of small business loans: increasing bank capital and reducing problem assets. A review of recent policy initiatives suggests that influencing bank capital may be easier than addressing problem assets. However, reducing problem assets may lead to a larger and more persistent increase in the supply of loans.

Suggested Citation

  • Jon Christensson & Jim Wilkinson, 2011. "Can the supply of small business loans be increased?," Economic Review, Federal Reserve Bank of Kansas City, vol. 96(Q II).
    • Handle: RePEc:fip:fedker:y:2011:i:qii:n:v.96no.2:x:3
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    References listed on IDEAS

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    1. Miguel Ramirez & Aalok Pandey, 2012. "Why does the Cost of Credit Intermediation Increase for Small Firms Relative to Large Firms during Recessions? A Conceptual and Empirical Analysis," Working Papers 1205, Trinity College, Department of Economics.
    2. Seghezza, Elena & Morelli, Pierluigi, 2020. "Why the money multiplier has remained persistently so low in the post-crisis United States?," Economic Modelling, Elsevier, vol. 92(C), pages 309-317.

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