If you think that banks are less interested in lending to small business than they used to be, you’re right. In 2012, only 29 percent of all non-farm, non-residential, loans were less than $1 million, a Federal Deposit Insurance Corporation (FDIC) proxy for small business lending.

But the financial crisis isn’t the primary cause of bankers’ shift away from small business lending, despite what many people have suggested. The decline in the fraction of small business loans began well before the financial meltdown.

Data from the FDIC, which keeps records of bank loans to small businesses, shows that small loans (less than $1 million) to business have been a decreasing fraction of all bank loans for the past decade and a half.

small loan share

Source: Created from FDIC data.

As the figure above shows, the rate of decline in the small loan share accelerated in 2008 and 2009, suggesting the impact of the financial crisis. But the decline had clearly started much earlier than 2007.

Because banks began to shift away from small business lending well before the financial crisis and Great Recession, post-2007 changes in the small business finance system aren’t the most likely explanation for the decline.

So what is? I don’t know, but the experts have offered a couple of hypotheses.

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