Structural Obstacles Slow Business Lending

After the 2008–2009 recession, there was a gap in access to capital for small businesses. It is tempting to blame this on regulation or other cyclical issues. But longer-term structural factors had been putting pressure on banks for decades. Community banks, which have traditionally had a disproportionately large role in lending to small businesses, had been declining since the 1980s. The concentration of assets in large banks reduced the amount of capital focused on small businesses. Larger banks have tended to prioritize consumer banking, mortgages, and investments, often viewing small business loans as less profitable. Indeed, small business loans are riskier, have transaction costs that do not scale, and are difficult to securitize. This chapter assesses the structural factors that have, over several decades, reduced small businesses’ access to capital.