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Bank failures, local business dynamics, and government policy

Author

Listed:
  • Salvador Contreras

    (The University of Texas Rio Grande Valley)

  • Manthos D. Delis

    (Montpellier Business School)

  • Amit Ghosh

    (Texas A&M International University)

  • Iftekhar Hasan

    (Fordham University, Bank of Finland, and University of Sydney)

Abstract

Using MSA-level data over 1994–2014, we study the effect of bank failures on local business dynamics, in the form of net business formation and net job creation. We find that at least one bank failure in the metropolitan statistical area (MSA) with the mean population prevents approximately 475 net businesses from forming in that area, compared with MSAs that experience no bank failures, ceteris paribus. The equivalent effect on net job creation is 16,433 net job losses. Our results are even stronger for small businesses, which are usually more dependent on bank-firm relationships. These effects point to significant welfare losses stemming from bank failures, highlighting an important role for government intervention. We show that the Troubled Asset Relief Program (TARP) is effective in reducing the negative effects of bank failures on local business dynamics. This positive effect of TARP is quite uniform across small and large firms.

Suggested Citation

  • Salvador Contreras & Manthos D. Delis & Amit Ghosh & Iftekhar Hasan, 2022. "Bank failures, local business dynamics, and government policy," Small Business Economics, Springer, vol. 58(4), pages 1823-1851, April.
    • Handle: RePEc:kap:sbusec:v:58:y:2022:i:4:d:10.1007_s11187-021-00478-5
    DOI: 10.1007/s11187-021-00478-5
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    Cited by:

    1. Contreras, Salvador & Ghosh, Amit & Hasan, Iftekhar, 2023. "The effect of bank failures on small business loans and income inequality," Journal of Banking & Finance, Elsevier, vol. 146(C).

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