preface for funding of small business in Europe

 This Data Point article focuses on small business credit, examining patterns in small business lending (SBL) and the sources of this lendin...

 This Data Point article focuses on small business credit, examining patterns in small business lending (SBL) and the sources of this lending among depository institutions pre-Great Recession (2004-2007), through the Great Recession (2008-2009), and then throughout the post-Great Recession Recovery period (2010-2017). 2 Unlike previous studies of small business credit, we drill down to analyze variation in lending and sources of lending across a number of different community characteristics. What becomes clear from this granular analysis is the significant variation in impacts of the Great Recession and the Recovery on different geographies. This report offers a descriptive story of small business lending during these three time periods, which illustrates the geographic landscape and variation of this lending. This contributes to the efforts that the Bureau, other government agencies, and private industry are making to improve access to credit. The following analysis will feature descriptive statistics and discussion of trends, 

primarily through a geographic lens, to explore variation across the country during and after the Great Recession. Any discussion of causes of the Great Recession, or any causal linkages between the trends observed in small business lending and other economic activity during or after the Great Recession itself, are outside the scope of this report. Key Findings  Overall, small business lending growth during the Pre-period (2004-2007) was strong, but gains were greater in urban, more populated, wealthier, and more educated counties.  Although there was substantial variation in small business lending growth during the Pre-period (2004-2007), virtually all counties were affected similarly by the Great Recession (2008-2009).  Overall, small business lending growth was weak during the Recovery (2010-2017). In the typical county, by 2017 small business lending had only recovered to roughly half of 2004 levels.

 The number of large banks, community banks, credit unions and thrifts has been declining since 2004.  Compared to credit unions, each of the other lender types is relatively more likely to offer small business lending products. However, the proportion of credit unions that offer small business lending products has roughly doubled since 2004 (from 10 percent to 20 percent).

1.2 Background According to the Small Business Administration (SBA) Office of Advocacy, there were approximately 30 million small businesses employing just under 48 percent of all U.S. employees in 2017. 3 In addition to comprising a major component of the U.S. economy, small businesses have also had a significant impact on job creation, generating 62 percent of net new private sector jobs since the Great Recession, which is consistent with the trend over the last 25 years. 4 Given their importance, much has been written about small businesses, especially the impact of the Great Recession on small businesses, and small business’ role in the Recovery. Much of this work has focused on two important findings, significant declines in small businesses caused by the Great Recession, and the decline in the number of community banks, which are a key source of credit for small businesses. 

On the business side, firm entry declined during the Great Recession, failing to compensate for failing older businesses resulting in a “missing generation” of entrepreneurs. 6 Other work by the Federal Reserve showed that jobs at small businesses declined between 2007 and 2009. 7 On the lender side, a recent study commissioned by the SBA Office of Advocacy and conducted by researchers at DePaul University showed that lending from banks to small businesses increased from $308 billion in 1994 to $659 billion in 2008, but then fell 18 percent down to $543 billion by 2011. 8 Researchers have identified a number of demand- and supply-side effects that have impacted the ability of traditional financial institutions to offer small business credit compared to other financial products. 9 The reductions in access to capital due to these challenges have been exacerbated by recent bank and branch closures, reducing the formal banking options available to small businesses. 10 Between 2009 and 2011, 389 banks across the nation failed. 11 Additionally, from 2008 to 2016, 6,008 bank branches closed. 12 Bank failures

 and closures reduce the number of competitors and could have an adverse impact on the supply of credit and the terms and conditions of credit. As an example, counties more reliant on the top four banks prior to the Great Recession, i.e. more SBL concentrated among the top four banks, had less credit available for small businesses, higher interest rates on loans, and an overall contraction of economic activity. 13 This paper extends the research previously cited by looking more deeply at small business lending at a geographical level and analyzing the evolution of small business credit granting institutions following the great recession. Different descriptions of small business lending are analyzed in Section 3 of this paper and Section 4 looks at the evolving landscape of financial institutions granting small business loans.

2. Data The Federal Financial Institutions Examination Council’s (FFIEC) Community Reinvestment Act (CRA) data is a primary data source used to analyze patterns in small business lending. Each year, banks and thrifts that exceed a stated asset threshold must report information on the number and dollar amount of originated loans, lines of credit and credit cards to small businesses and farms by census tract. CRA defines “loans to small businesses” as originated loans with loan amounts less than $1 million that were reported on the Call Report as secured by nonfarm or nonresidential real estate or as commercial and industrial loans, and “loans to small farms” as originated loans with loan amounts less than $500,000 that were reported to the Call Report as secured by farmland and to finance agriculture production and loans to farmers. According to the FFIEC, CRA data covers 71 percent of small business loans outstanding (by dollars) of institutions reporting under the Bank Call Report. 14 We rely on CRA data here, because Call Report data is at the national level and therefore not suited for the type of geographic analysis in this paper. CRA data is available from 2004-2017, and the figures in this Data Point feature data running up until 2017 to reflect the data available. The best benchmark to assess the impact of the Great Recession in comparison to the pre-period is 2004 due to the fact that it represented the conditions of the pre-Recession while allowing for time for the economy to recover from the 2001 Recession. Although CRA data provides a useful picture of the small business lending market at both the national and local levels, the data has limitations. First, the definition of “small business loan” is based off the size of the loan rather than the size of the business. As a result, CRA data includes small-dollar loans to large businesses and excludes large-dollar loans to small businesses. A limitation of the CRA threshold of 1 million and $500,000 is that fewer loans are considered over time because the real value of the threshold falls as a result of inflation. Part of the story of decreasing small business loans under this threshold could be as a result of those businesses now applying for loans over $1 million. Second, only banks and thrifts that meet a particular asset size threshold for the prior two years are required to report (the 2016 and 2017 reporting thresholds were $1.226 billion). Smaller banks, credit unions, online lenders and other nondepository lenders are not required to report CRA data. Although CRA-reporting entities still comprise the largest portion of the small business lending market, CRA data could present an incomplete assessment of small business lending patterns if the Great Recession had different

 impacts on non-CRA reporters. 15 The final important limitation of CRA data is that term loans, lines of credit, and credit cards are aggregated in the data. This is a concern for small business lending since cards and loans are very different products and serve different business purposes. The FFIEC Bank/Thrift Call Report and the National Credit Union Administration (NCUA) Credit Union Call Report are additional data sources for the analysis of small business lending. Each quarter, banks, thrifts, and credit unions file a report of their financial condition to their regulator. Although there are significant differences between the two call reports, this report will only use a relatively similar, small subset of call report data to flag whether a financial institution offers small business lending products. Banks and thrifts are flagged as “small business lenders” if the institution has reported at least one small business loan/line outstanding as of year-end. 16 Credit unions are flagged as small business lenders if they have at least one-member business loan outstanding on their books in the last year. 17 A variety of additional data sources are used to augment the CRA and Call Report data. These data include the American Community Survey (for educational attainment), County Business Patterns (counts of employer businesses), Census Population statistics, FDIC Community Bank indicator, Local Area Unemployment Statistics, Non-employer Statistics (counts of nonemployer businesses), Small Area Income/Poverty Estimates (for estimates of household income and poverty rates), and Summary of Deposits (for matching lenders across datasets). See Appendix A for sources and additional information about each dataset.