From housing bust to credit crunch: Evidence from small business loans

Abstract

This paper provides evidence that the 2007–2009 housing bust in the United States precipitated a “credit crunch” for small businesses. To remove demand‐driven correlations, we rely on within‐city comparisons. We ask whether banks whose mortgage portfolios were more heavily weighted in harder‐hit cities cut back lending to a greater extent in all cities where they make small business loans, relative to other banks in those cities. The evidence is consistent with a credit crunch. Large banks reacted with heavier cuts, but consistent evidence is also found among smaller banks. Quantitatively, the detected contribution to the overall decline in lending from the crunch appears modest.

Dynamism Diminished: The Role of Housing Markets and Credit Conditions

“…A natural alternative to this ageinvariance hypothesis says that the local industry response rises with its young-firm activity share due to wealth, collateral, and liquidity effects of house prices on the propensity to start a new business or expand a young one. We find overwhelming statistical evidence against the age- 4 Other related work with a focus on the Great Recession period includes Chodorow-Reich (2014), Burcu et al (2015), Huang and Stephens (2015) and Siemer (2018). Our empirical approach to identifying bank loan supply shocks is closest to that of Greenstone et al (2015).…”

Do Credit Market Shocks Affect the Real Economy? Quasi-experimental Evidence from the Great Recession and “Normal” Economic Times

“…Combined, these two effects reduced liquidity and led banks to cut new lending. Using Community Reinvestment Act data, Huang and Stephens (2011) show that multi-market banks' exposure to markets with housing busts affected the supply of small business loans within all MSAs. A similar conclusion is reached by Berrospide et al (2011).…”

Housing bust, bank lending & employment: Evidence from multimarket banks

“…9 Evidence on whether housing shocks impacted the economy through the bank balance sheet channel is also mixed. 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).…”

“…I construct two measures of bank exposure to real estate losses based on the extent to which a bank operates in distressed counties. 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.…”