The Impact of the Late 2000's Financial Crisis on the Supply of Bank Credit to Small Businesses: Evidence from the UK

Abstract

The paper presents evidence from a large UK data-set regarding the impact of the financial crisis in 2007-9 on the availability and terms of bank credit provided to SMEs. Holding credit risk constant, businesses applying for bank debt in 2007-8 and 2008-9 respectively were increasingly likely to be turned down (relative to 2001-4). This is consistent with a progressive tightening of lending thresholds as the financial crisis deepened. However bank credit margins fell in 2007-8 and only increased in 2008-9; and the ratio of collateral to loan amount increased in 2007-8 but fell in 2008-9. The fall in margins in 2007-8 is consistent with banks lowering risk on their loan portfolios; and the increase in collateral ratios at the same time is consistent with signalling by lower risk businesses to obtain credit (as uncertainty increased). The increase in margins in 2008-9 is consistent with the hike in the cost of capital following Lehman Brothers collapse; and the fall in collateral ratios at the same time is consistent with rapidly falling asset prices as the crisis deepened. The paper concludes with a discussion of how policy-makers, banks and small businesses have reacted to the crisis.

Keywords: bank lending, small business, access to finance, financial crisis JEL Classification: G01 (Financial crisis); G21 (Banks); H12 (Crisis management); L26 (Entrepreneurship)