US Regional Small Business Lending: Impact of Liquidity Regulation and FinTech Lenders

Research by: Çağlar Hamarat & Daniel Broby

Executive Summary

The paper “US Regional Small Business Lending: Impact of Liquidity Regulation and FinTech Lenders” examines whether small and medium-sized enterprises (SMEs) are turning to FinTech peer-to-peer (P2P) lenders as a response to reduced access to traditional bank financing. Given that FinTech lenders often prioritise Environmental, Social, and Governance (ESG) principles, this shift could have significant implications for green finance and sustainable economic growth.

The research explores the effects of the US Liquidity Coverage Ratio (LCR) implementation on small business lending by banks and contrasts this with FinTech P2P lending, which operates outside the same regulatory constraints. Using a difference-in-differences (DiD) empirical model, the study finds that while banks reduced their lending to small businesses due to liquidity regulation, there was no significant county-level impact. Moreover, FinTech lenders did not substantially fill the lending gap, likely due to their lack of access to retail deposits. The study introduces the investigation by observing that P2P lending platforms provide alternative sources of credit and promote financial inclusion. It points out that the Theory of Financial Intermediation suggests that intermediaries, such as P2P lenders, can mitigate issues that result from asymmetric information more effectively than traditional banks.

By way of background, the Basel Committee on Bank Supervision published a three-pillar framework, originally as Basel II and subsequently updated by Basel III. This pertained to regulated banks and not FinTech lenders. It addressed risks in the banking system. It strengthened bank capital rules and the regulation of the liquidity. At approximately the same time, LCR implements and interprets Basel in the US. It requires regulated banks to have adequate liquid asset levels, enabling a bank to survive financial stress for at least 30 days.

Hamarat and Broby test whether:

Hypothesis 1: Ceteris paribus, regulated banks will decrease their small business loan shares after the introduction of the LCR, compared to exempt banks.

They argue that the LCR regulations can particularly affect banks with a large and high market share, potentially leading to a reduction in small business loans in the counties where these banks operate, especially in regions with low competition. The existing literature suggests that in regions with limited competition among banks, the decline in lending may be more pronounced as there are fewer alternative sources for small businesses to access funds. They therefore also test whether:

Hypothesis 2: Ceteris paribus, after the implementation of the LCR, there will be a decline in aggregate small business lending in counties where banks are affected by the legislation and face low competition.

The study highlights the potential of FinTech firms to mitigate information asymmetry and reduce search costs, offering an alternative financing channel for SMEs. Given the importance of SMEs to economic development and the role of FinTech in advancing ESG-aligned investments, the authors call for policy interventions to strengthen the role of FinTech in green finance.

The study recommends that policymakers introduce clear ESG risk assessment frameworks, expand green credit guarantee programmes, and encourage partnerships between banks and FinTech lenders to co-lend or syndicate loans for sustainable projects. By integrating green finance into future liquidity regulations, financial systems can better support climate-friendly investments and ensure SMEs have continued access to credit. These findings highlight the need for a regulatory approach that balances financial stability with economic growth and sustainability objectives.

To cite this article: Hamarat, C., & Broby, D. (2025). US regional small business lending: Impact of liquidity regulation and FinTech lenders. The Singapore Economic Review. https://doi.org/10.1142/S0217590825490062

To access this article: https://doi.org/10.1142/S0217590825490062

About the Journal

The Singapore Economic Review is a general economics journal devoted to publishing the best policy and applied economics papers quarterly, in addition to high-quality theoretical pieces. Widely regarded as a leading journal in the Asia-Pacific, it has a long history of publication on economic issues impinging on Southeast Asia and the broader Asia-Pacific region.

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