Bank Liquidity, Small Business Lending, and Real Outcomes

Abstract

Using the NETS database, which covers the universe of establishments in the U.S., we evaluate how shocks that improve credit conditions in a county affect small businesses in that county across different size groups. We find that positive shocks to the county credit environment stimulate the growth of relatively larger firms, but crowd out micro firms. To identify county-specific shocks, we exploit technology-driven deposit shocks and bank branch networks, and compute the extent to which banks in a county receive liquidity shocks through branch networks in other counties. Consistent with the credit view, we show that banks receiving a positive liquidity shock expand credit to larger firms, but not to micro firms.