Finance and Economics Discussion Series

Does Credit Supply Affect Small-Firm Finance?

Tara Rice and Philip E. Strahan
2008-54

Abstract: States were granted authority to limit interstate branching following passage of Federal legislation in 1994, relaxing restrictions on geographical expansion by banks. We show that differences in state�s branching restrictions affect credit supply. In states more open to branching, small firms borrow at interest rates 25 to 45 basis points lower than firms operating in less open states. Firms in open states also are more likely to borrow from banks. Despite this evidence that interstate branch openness expands credit supply, we find no effect of variation in state restrictions on branching on small-firm borrowing or other indicators of credit constraints.

Keywords: Financial institutions, small business, credit supply