Stress Tests and Small Business Lending

Abstract

Post-crisis stress tests have altered banks’ credit supply to small business. Banks most affected
by stress tests reallocate credit away from riskier markets and toward safer ones. They also raise
interest rates on small loans. Quantities fall most in high-risk markets where stress-tested banks
own no branches, and prices rise mainly where they do. The results suggest that banks price the
stress-test induced increase in capital requirements where they have local knowledge, and exit
where they do not. Stress tests do not, however, reduce aggregate credit. Small banks seem to
increase their share in geographies formerly reliant on stress-tested lenders.

Keywords: small business lending, stress test, credit supply, large banks

JEL Classification: G2