Financial Crises, Financial Constraints, and Government Guarantees

Abstract

In this paper I ask whether and how government intervention in credit markets can help to ease financial constraints and encourage growth for small firms during financial crises. I focus my analysis on the presence of banks who take part in the Small Business Administration (SBA) 7(a) guaranteed lending program in a local market, and ask whether access to government-backed loans encouraged lending to small firms during the recent financial crisis when they were particularly constrained. I find that areas with a greater proportion of SBA guaranteed lenders saw a greater volume of small business loans during the crisis, and these areas experienced better real outcomes in terms of employment and establishments, especially for the smallest firms. This result is robust to controlling for a host of concurrent demand and supply characteristics, using alternative definitions of SBA market presence, and controlling for endogeneity through instrumental variables. This paper contributes to the literature examining access to finance and growth and the role of government intervention during crises. The findings suggest that targeted government support to small firms can play a beneficial role in the recovery of local regions in the presence of private credit market frictions.