THE CREDIT CRUNCH AND THE AVAILABILITY OF CREDIT TO SMALL BUSINESS

We present estimates of how much bank loans and real activity in small businesses responded to changes in banks' capital conditions and othe r bank and aggregate economic conditions. Using data for 1989-1992 by state, we estimated the effects of those factors on employment, payrol ls, and the number of firms by firm size; as well as on gross state pr oduct. In response to declines in their own bank capital, small banks shrank their loan portfolios considerably more than large banks did, L arge banks tended to increase loans more when small banks were under i ncreased capital pressure than vice versa, Real economic activity was reduced more by capital declines and by loan declines at small banks t han at large banks. Small banks were making ''high-powered loans'' in that dollar-for-dollar loan declines in their loans had larger impacts on economic activity than loan declines at large banks did. Capital d eclines at small banks produced larger changes in economic activity do llar-for-dollar than capital declines at large banks did. Aggregate ec onomic conditions had smaller effects on small firms than on large fir ms and smaller effects on small banks than on large banks, The evidenc e hinted that the volume of loans made under Small Business Administra tion (SBA) loan guarantee programs shrank less in response to declines in bank capital than the volume of loans not made under the SEA loan guarantee programs. (C) 1998 Published by Elsevier Science B.V. All ri ghts reserved.