Risk-taking and Monetary Policy Transmission:Evidence from Loans to SMES and Large Firms

Résumé

Using administrative firm-bank-loan level data from the U.S., we document four new facts about thecredit market. First, private firms’ (SMEs’) borrowing from banks comprises their entire balance sheetdebt, compared to large publicly listed firms who can switch between bond markets and drawing fromtheir credit lines. Second, SMEs borrow shorter maturity and pay higher interest rates relative to largelisted firms. Third, SMEs mostly use their enterprise’s continuation value as collateral rather thanfixed assets and real estate. Fourth, the relation between collateral and risk—where risk is measuredby the loan spread—is positive for large listed firms but negative for SMEs. Based on these facts, weshow that monetary policy transmission and risk-taking differ across SMEs and large listed firms.When monetary policy is expansionary, credit demand of SMEs with high leverage increases more.SMEs’ borrowing capacity expands more given their frequent use of earnings and operations-basedcollateral. We find no evidence of risk-taking by banks as they lend less to firms who defaulted beforeand likely to default in the future. Our results from the sample of all U.S. firms mimic those of SMEsand imply that the aggregate effects of monetary policy might depend on the size distribution of firmsand the type of collateral used. Since SMEs cover 99 percent of all firms and over 50 percent of U.S.employment and output, our results also have important implications for aggregate boom-bust cycles.