Are the Supervisory Bank Stress Tests Constraining the Supply of Credit to Small Businesses?

Are the Supervisory Bank Stress Tests Constraining the Supply of Credit to Small Businesses?

The Clearing House (TCH) published a new research note “Are the Supervisory Bank Stress Tests Constraining the Supply of Credit to Small Businesses?” that attempts to identify the impact of tighter capital requirements on the availability of credit to small businesses.  The note analyzes differences in small business loan growth at banks subject to the U.S. stress tests versus those that are not.  Because smaller banks are exempt from stress tests they can act as a “control” group in assessing the impact of new regulations on the supply of credit. Thus, differences in small business loan growth at large versus smaller banks are attributed to factors driving credit availability at banks. The research note’s results indicate that the U.S. stress tests are constraining the availability of small business loans secured by nonfarm nonresidential (NFNR) properties, which account for approximately half of small business loans on the books of all banks. The estimated impact is economically significant. According to the results of the research note’s empirical model, subjecting a bank to the U.S. supervisory stress tests leads to a reduction of more than 4 percentage points in the annual growth rate of its small business loans secured by NFNR properties, which translates to a $2.7 billion decrease in the aggregate holdings of these small business loans each year on average.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.