The 2003 U.S. Dividend Tax Cut, Small Business Loan Supply, and the Real Economy

Adequate credit availability for small businesses is an important public policy issue because small businesses are essential for employment and economic growth for the economy. The Gramm-Leach-Bliley Act of 1999 includes a provision that could potentially support financial institutions in the provision of credit to small businesses through the use of advances from the Federal Home Loan Bank (FHLB) system that are secured with small business loans. We explore the relation between FHLB advances to financial institutions and the provision of loans to small businesses. We find a positive link between the change in FHLB advances and the change in small business loans and the level of FHLB advances and the level of small business loans. This relation holds for large and small banks and pre- and post-2007 recession. However, we find that the change in the proportion of small business loans to assets is only positively related to the change in the advances to assets ratio prior to the recessionary period. This suggests that banks substitute small business loans for other types of assets during relatively normal economic periods, but FHLB advances are a source of wholesale funds that will be invested in the most attractive financial assets available with no preference for any particular asset during periods of contracting credit.

Are capital requirements on small business loans flawed?

I investigate how the consolidation of securitization entities under SFAS 166 and 167 spills over to banks' supply of small business loans, which are rarely securitized in the United States. This spillover operates through two channels. (1) In the leverage channel, consolidating banks downsize their entire loan portfolios, both small business loans and other loans, in response to increased leverage after consolidation. (2) In the risk management channel, consolidating banks adjust the mix of loans to maintain optimal diversification. The adjustment can increase the supply of small business loans when their performance covaries positively with the performance of other loans. I find that, on average, banks that consolidate more securitized assets reduce small business lending; consequently, counties with a greater market share of consolidating banks experience slower growth in small businesses. I also identify a small group of banks with sufficiently large positive performance covariance that increase small business lending. Data Availability: All untabulated results are available upon request. JEL Classifications: M4; G21.

Abstract: Small Business Credit nowadays is a priority program of the government in promoting economic activities in the State of Indonesia. Small business loans in the banking sector becomes very important for economic growth in the State of Indonesia. Supervision of smoothness or lack launch of small business credit banking becomes very important, especially because there are many small business loan repayment is not lancer. Therefore to know the cause of lack launch of Small Business Credit process, especially in terms of return on the Small Business Loan Keyword: Small Business Credit, Banking, Economic Growth

We explore an inconsistency in the Basel Committee’s Internal Ratings Based (IRB) rules: the capital charges on corporate loans were calibrated to loan-level data, while the capital charges on small business loans were calibrated to fit the capital that a few international banks held prior to this regulation.We argue that the IRB capital charges do not put small business and corporate loans on a level playing field. While downturn risk of corporate loans is accurately captured by the IRB formulas, we show that small businesses have low downturn risk and require 3.5 times lower capital charges than those prescribed by the Basel Committee.

The opportunity zone (OZ) tax incentive program was introduced under the Tax Cuts and Jobs Act in 2017. Its aim is to stimulate investment in low- to moderate-income communities by offering tax benefits to investors. In this study, we evaluate the effect of the OZ program on small business lending and bank deposits in OZ-designated tracts. We use a dataset of tract-level small business loans and deposits from 2016 to 2021 with a difference-in-differences estimator on matched treatment (OZ-designated) and control (OZ-eligible but not designated) US Census tracts. Our findings indicate a modest increase in the total amount and number of originations of small business loans, translating to approximately $100 per tract resident. Additionally, OZ-designated tracts experienced a 6 to 10% increase in deposits relative to matched control groups, indicating enhanced economic activity. These results underscore the potential of the OZ program to foster economic growth and financial inclusion in underserved communities.

Fintech lending to small businesses is growing rapidly in the United States, but the industry remains largely unregulated. In this study, I examine borrower outcomes when a borrower states that they are using credit from a fintech for small business purposes; I subsequently examine the differences in loan terms for regulated versus unregulated small business credit. I find that small business loans are charged a higher rate of interest than consumer loans from the same fintech lender, and also find that small business fintech loans have worse terms than small business loans from regulated banking entities. I propose a regulatory framework to offer small business borrowers protection from predatory fintech lenders and to clarify the proper regulators of this growing industry.

Small businesses have long relied upon banks to produce sufficient information to be able to profitably lend to them. In recent years information production has also taken place among information service bureaus, such as Dun and Bradstreet (D&B). There has been some evidence to suggest that these information brokers have allowed small firms to break away from their lending relationships.In this paper, we present a model of how small business loans are analyzed, focusing on the information that is necessary to produce. Based on the insight from that model, we build a multinomial logistical regression model to estimate joint probabilities that a firm with at least one line of credit will fall into certain categories of D&B credit rating and secured/unsecured line of credit. From this multinomial logistic regression model, we derived conditional logistic regression, where the probability the line of credit is secured is conditioned upon the credit rating category.We find that the length of a relationship with the line of credit lender is only a significant predictor of collateral for firms with lower credit ratings, consistent with the theory that relationships are needed to overcome informational opacity. In fact, it appears from the set of logistic regressions run, that the significance of the length of the lending relationship to the granting of unsecured lines of credit reported in earlier research is driven solely by firms with lower credit ratings. The length of the relationship was not significant in assessing the probability of secured lines of credit for those with the highest credit rating.

We test whether dividend taxes affect corporate investments. We exploit Sweden’s 2006 dividend tax cut of 10 percentage points for closely held corporations and five percentage points for widely held corporations. Using rich administrative panel data and triple-difference estimators, we find that this dividend tax cut does not affect aggregate investment but that it affects the allocation of corporate investment. Cash-constrained firms increase investment after the dividend tax cut relative to cash-rich firms. Reallocation is stronger among closely held firms that experience a larger tax cut. This result is explained by higher external equity in cash-constrained firms and by higher dividends in cash-rich firms after the tax cut. The heterogeneous investment responses imply that the dividend tax cut raises efficiency by improving allocation of investment.

We test whether dividend taxes affect corporate investments. We exploit Sweden's 2006 dividend tax cut of 10 percentage points for closely held corporations and five percentage points for widely held corporations. Using rich administrative panel data and triple-difference estimators, we find that this dividend tax cut affects allocation of corporate investment. Cashconstrained firms increase investment after the dividend tax cut relative to cash-rich firms. Reallocation is stronger among closely held firms that experience a larger tax cut. This result is explained by higher nominal equity in cash-constrained firms and by higher dividends in cash-rich firms after the tax cut. The heterogeneous investment responses imply that the dividend tax cut raises efficiency by improving allocation of investment.

In a long-awaited move, Congress enacted legislation last fall authorizing full interstate banking. While most states had already acted to allow some form of entry by outside holding companies, the new law was expected to hasten the spread of large multi-office banking organizations. Most analysts believe the change will benefit the public by increasing competition, improving services to depositors, and reducing banks' vulnerability to local downturns. Concern has been voiced, however, that the benefits of multi-office banking may be achieved at the expense of small businesses. Specifically, some analysts worry that large multi-office banks will be less able or less willing to lend to small businesses than the smaller banks they replace. Such a decline in small business lending could have serious consequences, these analysts argue, because small businesses account for a major share of job creation and lack alternative sources of financing. This article investigates the relationship between multi-office banking and small business lending using new information on small business loans in Tenth District states. Data for mid-1994 show that branch banks, smaller banks in multibank holding companies, and banks owned by out-of-state companies all tend to lend a smaller proportion of their funds to small businesses than other banks. These results support the view that further growth in multi-office banking may impose short-run costs on some small businesses. The article cautions, though, against concluding that multi-office banking should be curtailed. Instead, regulators should continue to ensure that local banking markets remain competitive, so other banks can step in and fill any gaps in the legitimate credit needs of small businesses. The first section of the article reviews the controversy over the effects of multi-office banking on small business lending. The second section describes the different forms of multi-office banking in Tenth District states. The third section presents the evidence on small business lending by multi-office banks in the district. The article concludes with a discussion of the policy implications. THE CONTROVERSY OVER MULTI-OFFICE BANKING AND SMALL BUSINESS LENDING While the advent of interstate banking has heightened interest in the issue, the debate over the effects of multi-office banking on small business lending goes back many years. In the first half of the century, the debate centered on differences in the lending behavior of branch banks and unit banks--banks with only one office. Later, as the holding company form of organization spread in the 1960s and 1970s, analysts debated whether banks affiliated with multibank holding companies (MBHCs) were less disposed to lend to small businesses than independent banks. More recently, as states moved to allow some form of interstate banking in the 1980s, attention turned to differences in lending behavior between in-state banks and banks owned by out-of-state MBHCs. This section reviews the effects these various forms of multi-office banking might have on small business lending and summarizes previous research. Why multi-office banks might make fewer small business loans Banking analysts have suggested several reasons why large, multi-office banks might lend less to small businesses than other banks.(1) One reason is that large banks do not have to rely as heavily on small borrowers to achieve a desired level and composition of commercial lending. Because loans to a single borrower cannot exceed a certain percentage of a bank's capital, small banks are legally prohibited from making loans above a certain size.(2) Also, given the limited funds at their disposal, the only way small banks can spread their risks sufficiently is by making a large number of small loans. If small banks instead made a small number of large loans, they would be more vulnerable to bad luck on the part of a few customers. Large banks do not have such concerns, both because the single-borrower loan limit is not binding for them and because they have enough finds to make mostly large loans and still spread their risks. …

Consolidation in banking raise concerns about exclusion and predatory practices in small-business lending. Fintech lenders, largely unregulated credit providers with lending decisions and loan terms determined primarily by algorithm, have rapidly increased their lending to small businesses. I analyze loan-level data on consumer and small business loans from Fintech lenders and a comparison sample of small-business loans from regulated bank lenders. Fintech small-business loans charge average annual interest rates 3 percentage points higher than consumer loans from the same lender and 4 to 7 percentage points higher than small business loans from regulated banking entities. The large interest-rate premium points to the need for regulatory clarity and additional supervision to protect this crucial market segment from predatory non-bank lenders.

This paper tests whether the 2003 dividend tax cut—one of the largest reforms ever to a US capital tax rate—stimulated corporate investment and increased labor earnings, using a quasi-experimental design and US corporate tax returns from years 1996–2008. I estimate that the tax cut caused zero change in corporate investment and employee compensation. Economically, the statistical precision challenges leading estimates of the cost-of-capital elasticity of investment, or undermines models in which dividend tax reforms affect the cost of capital. Either way, it may be difficult to implement an alternative dividend tax cut that has substantially larger near-term effects. (JEL C72, C78, C91)

This paper estimates the implicit capital requirements in the U.S. supervisory stress tests. Our results show that stress tests are imposing dramatically higher capital requirements on certain asset classes – most notably, small business loans and residential mortgages – than bank internal models and Basel standardized models. By imposing higher capital requirements on loans to small businesses and mortgage loans, stress tests are likely curtailing credit availability for the types of borrowers that lack alternative sources of finance. In addition, we identify the impact of supervisory stress tests on the availability of credit to small businesses by analyzing differences in small business loan growth at banks subject to stress tests versus those that are not. Our results indicate that the U.S. stress tests are constraining the availability of small business loans secured by nonfarm nonresidential properties, which accounts for approximately half of small business loans on banks’ books.

Government guaranteed small business loans and regional growth