Working Paper 95-1
by Joe Peek and Eric S. Rosengren

Investigators examining problems with credit availability during the most recent recession have been unable to provide definitive evidence that the decline in bank loans was, at least in part, a supply phenomenon. Furthermore, they have not focused on the subset of loans made to borrowers most likely to be dependent on bank financing. This study overcomes these flaws. By examining formal regulatory actions, we clearly identify a supply shock that caused an abrupt decline in bank lending that cannot be attributed to demand. Furthermore, we find that this decreased lending occurred at institutions and in lending categories serving those firms most likely to be dependent on bank financing. This decline in lending to small businesses was likely a contributing factor to the unprecedented increase in business failures in New England.

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