I. Job Growth and Small Business Lending

Small and new businesses, widely credited as engines for job growth, have struggled during the recovery. One reason, say some analysts, is that bank lending to small businesses has declined steadily since the start of the recession. If, as many small businesses claim, the supply of credit from banks has contracted, then increasing the supply of small business loans may allow these businesses to grow and create new jobs. Understanding the factors that affect loan supply may help policymakers design policies to increase the supply of small business loans and, therefore, support further job growth. This article analyzes the potential effectiveness of two strategies that policymakers can use to expand the supply of small business loans: increasing bank capital and reducing problem assets. A review of recent policy initiatives suggests that influencing bank capital may be easier than addressing problem assets. However, reducing problem assets may lead to a larger and more persistent increase in the supply of loans. Section I examines the connection between job growth and small business lending. Section II reviews supply and demand factors that affect lending decisions at banks. It focuses on two supply factors—