Small Business Lending and Regulation for Small Banks

Abstract

Since May 2015 several U.S. Bank Holding Companies (BHCs) have been newly classified as small banks by regulators, thus benefiting from a friendlier regulatory capital environment. Using a difference-in-differences setting, we show that less regulation on small BHCs boosts small business lending of the affiliated commercial banks. We employ various tests to demonstrate that these findings are attributable to a capital channel where increases in lending are driven by the preferential capital treatment granted to the small BHC. The regulatory capital relief also has some positive effects for the local economy. Overall, the effects of the regulatory capital relief for small BHCs are consistent with its desired policy objectives. This paper was accepted by Tomasz Piskorski, finance.