CREAT: Census Research Exploration and Analysis Tool

U.S. Banks' Artificial Intelligence and Small Business Lending: Evidence from the Census Bureau's Annual Business Survey

February 2025

Working Paper Number:

CES-25-07

Abstract

Utilizing confidential microdata from the Census Bureau's new technology survey (technology module of the Annual Business Survey), we shed light on U.S. banks' use of artificial intelligence (AI) and its effect on their small business lending. We find that the percentage of banks using AI increases from 14% in 2017 to 43% in 2019. Linking banks' AI use to their small business lending, we find that banks with greater AI usage lend significantly more to distant borrowers, about whom they have less soft information. Using an instrumental variable based on banks' proximity to AI vendors, we show that AI's effect is likely causal. In contrast, we do not find similar effects for cloud systems, other types of software, or hardware surveyed by Census, highlighting AI's uniqueness. Moreover, AI's effect on distant lending is more pronounced in poorer areas and areas with less bank presence. Last, we find that banks with greater AI usage experience lower default rates among distant borrowers and charge these borrowers lower interest rates, suggesting that AI helps banks identify creditworthy borrowers at loan origination. Overall, our evidence suggests that AI helps banks reduce information asymmetry with borrowers, thereby enabling them to extend credit over greater distances.

Document Tags and Keywords

Keywords Keywords are automatically generated using KeyBERT, a powerful and innovative keyword extraction tool that utilizes BERT embeddings to ensure high-quality and contextually relevant keywords.

By analyzing the content of working papers, KeyBERT identifies terms and phrases that capture the essence of the text, highlighting the most significant topics and trends. This approach not only enhances searchability but provides connections that go beyond potentially domain-specific author-defined keywords.
:
enterprise, microdata, survey, financial, financing, borrower, lending, loan, bank, lender, borrowing, debt, gdp, credit, banking

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The model is able to label words and phrases by part-of-speech, including "organizations." By filtering for frequent words and phrases labeled as "organizations", papers are identified to contain references to specific institutions, datasets, and other organizations.
:
Internal Revenue Service, Small Business Administration, Federal Reserve Bank, Federal Reserve System, Employer Identification Numbers, Paycheck Protection Program, Census Bureau Disclosure Review Board, Federal Statistical Research Data Center, National Center for Science and Engineering Statistics, Annual Business Survey

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