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Surprisingly, Treasury Purchases Of Goldman Sachs Preferred Stock Did Not Increase Small Business Lending

Why would you bail out a bank? Theories abound; perhaps you want to keep the capital markets functioning, or prevent contagion to other systemically important financial institutions, or perhaps you just like banks and bankers and would be sad if there were fewer of them or they had less money. Somewhat less likely, you could think to yourself “I want there to be more lending to small businesses, and the best way to go about that would be to buy preferred stock in a bunch of banks.” If that was your goal, and TARP was your bailout, then you failed:

A new report commissioned by the Small Business Administration confirms what a lot of business owners felt in the four years since the financial crisis: The government bailouts for banks did little to relieve the credit crunch for Main Street companies.

In fact, banks that took taxpayer money during the financial crisis of 2008-09 cut their lending to small businesses more than other banks did, according to the paper by Rebel Cole, a DePaul University economist. … TARP banks cut their lending to small businesses by 21 percent in that period, compared to a 14 percent drop at other banks, according to the paper.

Here’s the paper and here is a sad little chart from it:

Other not-quite-epiphanies abound:

First, we find a strong and significant positive relation between bank capital adequacy and business lending. … Our results suggest that higher capital requirements will lead to more business lending rather than less business lending, as the banking lobby is claiming.

Second, we find a strong and significant negative relation between bank size and business lending. This has important policy implications for regulators who are considering proposals to limit and/or reduce the size of the nation’s largest banks. Our new evidence suggests that proposals to reduce the size of the largest banks would likely lead to more business lending.

Third, we find a strong and significant negative relation between bank profitability [measured as ROA] and business lending.

My simple intuitive stylized model of this is … simple and intuitive (and stylized)! Here it goes:

  • There are big banks and they are very levered
  • They don’t lend to small businesses that much
  • They make lots of money by not lending to small businesses that much, concentrating instead on capital markets and churning out mortgages and other higher-risk higher-reward endeavors
  • Also by being very levered (also a higher-risk higher-reward endeavor)
  • The end
  • Except also they blew up a little in 2008 because they were more levered and volatile than the little well-capitalized unprofitable banks that were doing all the small business lending
  • So they got a bailout
  • The actual end

This is not hard to square with other studies of bank bailouts, like the Fed study showing that TARP banks reduced the amount of business loans they made while also ramping up their riskiness, or the BIS one showing that bailed out banks did more risky syndicated loans (not for small businesses!) than un-bailed-out ones. And here it is, for completeness’ sake.

The heartbeat that you can hear thumping beneath all of these studies is “some banks did bad, then they needed a bailout, and now they’re up to their old tricks,” which is … something. I suppose it’s an indictment of the bank bailouts, if your view of the bailouts was “they were supposed to stop banks from getting up to their old tricks.” This is of course the opposite of true: bank bailouts are designed to let banks keep getting up to their old tricks; if you wanted them to stop doing that you’d let them go bankrupt.1

That’s all very dispiriting if you’re the Small Business Administration I guess? There you were hoping that giving money to banks was somehow equivalent to giving money to small businesses, but it turns out that giving money to banks looks more like giving money to banks.

TARP Verdict: Bailouts Failed to Help Small Business [BBW]
How Did the Financial Crisis Affect Small Business Lending in the United States? [SBA]

1. If your view of the bailouts was “they were supposed to help small businesses,” that is similarly odd; you can just give money to small businesses and skip the banks altogether.

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14 Responses to “Surprisingly, Treasury Purchases Of Goldman Sachs Preferred Stock Did Not Increase Small Business Lending”

  1. Captain Obvious says:

    How much would bank lending to small businesses have fallen if all the big banks went bankrupt?

    TARP Happened, Bank lending went down, therefore TARP was useless. That's an asinine line of reasoning.

  2. Warren says:

    I'm not real happy with mine either.

    Call me re the warrants Lloyd.

    BAC capital markets is doing alot of stuff that interests me right now, and I may be looking to transfer several accounts that are active with you.

  3. Hobbes says:

    Hey small businesses. If you want loans, you should pay them back.

    Sincerely,

    Profitable Banks

  4. lucas says:

    With a Rebel Cole, he yelled More, More More.

  5. Quant me maybe says:

    I like your chain of reasoning here, Matt. I like strippers and am sad that there are fewer of them. If I become Treasury Chair, I will bail out strippers. The rest of the argument becomes irrelevant because the world will be a kinder happier place with more strippers. And, hence, the U.S. shall maintain world leadership in porn by preserving the efficiencies of a an efficient feeder system for more female porn talent.

  6. sohbet says:

    Chair, I will bail out strippers. The rest of the argument becomes irrelevant because the world will be a kinder happier place with more strippers. And, hence, the U.S. shall maintain world leadership in porn by preserving the efficiencies of a an

  7. The relax of the discussion becomes unrelated because the globe will be a gentler more happy position with more strippers. And, hence, the U.S. shall sustain globe authority in adult by protecting the effectiveness of a an