Policymakers who thought bailing out big banks would increase loans to small business were kidding themselves. Still, the bailout's Congressional Oversight Panel (COP) ran by Harvard Law Professor Elizabeth Warren published a report (.pdf) criticizing large institutions for disproportionally lending less money to smaller firms. The COP found Wall Street banks sharply reversed the trend of increasing their loans to smaller companies through 2007 by cutting their small business loan portfolios in 2008-2009 by 9% -- more than double the 4.1% decline of their entire loan portfolios. Despite the shock and rage Warren expressed this morning in an interview on CNBC (see below), big banks' behavior could have easily been predicted.
Small Business Loans Are Riskier
If there's any lesson of the financial crisis that the big banks took to heart, it was that they should be a little more careful about the loans they provide. Small business loans, however, generally include a great deal more risk than those to big businesses. A big firm may have other investors, a history of success, a capital base, a credit rating, etc. These features lead the large company to appear a much smaller credit risk than a start-up or a little firm that doesn't have as many factors that could help keep it going if problems arise.