From Housing Bust to Credit Crunch: Evidence from Small Business Loans

Abstract

This paper provides evidence that the recent housing bust in the United States precipitated a "credit crunch" for small businesses. Using detailed records of individual bank's lending history, we develop a measure of their exposure to the housing bust. This measure is then used to estimate the impact of a drop in house prices on the supply of loans. Specifically, we compare the lending behavior of banks in the same metropolitan areas, and find that those that originated more of their mortgage loans in depressed housing markets elsewhere reduced local small business lending more substantially. We find the effect to be greater for banks with more than $10bn in assets. Overall, our estimates suggest that the fall in house prices accounted for one third of the decline in small business loans originated by major banks from 2007 to 2009.

Housing Bust, Bank Lending & Employment: Evidence from Multimarket Banks

“…First, motivated by the findings that falling house prices impacted both the local economy (Mian and Sufi, 2014) and the supply of credit (Bord et al, 2014;Huang and Stephens, 2015), I calculate the average 2006 to 2009 house price appreciation in a bank's counties, weighted by the bank's volume of 2006 mortgage originations. Second, motivated by the finding that poor performance on construction loans disproportionately account for the elevated loan losses in areas with falling house prices, I also use a more construction specific measure.…”

“…Huang and Stephens (2015); Bord et al (2014); Berrospide et al (2016) use geographic variation in bank locations to show that banks exposed to housing and Robinson, 2014).…”

“…8 Peek and Rosengren (2000); Chava and Purnanandam (2011);Cetorelli and Goldberg (2012) for example study spillovers through multinational banks, while Morgan et al (2004); Huang and Stephens (2015); Berrospide et al (2016); Bord et al (2014) focus on transmission within the United States.…”

“…11 Huang and Stephens (2015); Bord et al (2014); Berrospide et al (2016) use market fixed effects to control for demand, making the primary object of study changes in market shares instead of county level effects. Bord et al (2014), however, also show that counties unaffected by house price declines experience employment losses if locally operating banks locate in distressed markets.…”

Financing Constraints and Unemployment: Evidence from the Great Recession

“…Between the second quarter of 2008 and the second quarter of 2010, small business loans made by commercial banks declined by over $40 billion. Recent evidence suggests that much of the decline in new lending re ‡ects changes in the supply of credit (Ivashina andScharfstein 2010, Huang andStephens 2011). Similarly, the responses to the Federal Reserve's Senior Loan O¢ cer Opinion Survey on Bank Lending Practices indicate that banks have signi…cantly tightened credit standards on Commercial and Industrial loans to small …rms in thirteen consecutive quarters between 2007:Q1 and 2010:Q1.…”