Heterogeneous Elasticities of Bank Loan Supply: Evidence from SBA Loan Guarantee Expansion

Abstract

US Small Business Administration (SBA) temporarily expanded its loan subsidy program from 2009 to 2010 in an effort to stimulate loans to small businesses. We explore the heterogeneous bank responses following this policy change. Using a novel data that merges the quarterly bank-level call report to the subsidized loan data, we first show that big banks prefer to issue many loans of small size while small banks issue few loans of bigger size.Abstract which can be explained through a simple portfolio optimization model with fixed cost. Then, we show that small banks — especially those that were part of SBA's Preferred Lender Program — increased both the extensive (number of loans) and the intensive (average loan size) margin the most. Then, we show that these big banks that make up the majority of the loan volume were particularly inelastic in increasing loan supply in response to this positive policy shock. This has strong policy implications given that a sizable amount of taxpayer's money was used to fund this temporary expansion.