This study is directed towards the effects of bank lending, delinquencies, and other economic shocks on the performance of economic activity. I estimate the effect of these factors on employment, payrolls, and number of firms by firm size in the United States. Addressing conditions within the realm of small banks, one conclusion is that banks increase their total supply of bank credit after a reduction in capital levels. A number of former studies arrive at this conclusion, and this paper applies that hypothesis to more recent data. A common theme in related literature is that a "credit crunch" causes particular stress on small businesses because of their heavy reliance on external financing, which is mainly provided by small "community" banks. Small banks have historically been thought to have special ties to small businesses, but with the consolidation of banks over recent years, this study suggests that relationship between small banks and small businesses has declined. Using data for banks with assets under $300 million from 2001-2005, this study reveals ways in which real activity is affected by variations in bank credit conditions.



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