How Important are Small Banks to Small Business Lending?  New evidence from a survey of small firms

Jith Jayaratne
John Wolken

         Typically, small banks lend a larger proportion of their assets to small businesses than do large banks.  The recent wave of bank mergers has thinned the ranks of small banks, raising the concern that small firms may find it difficult to access bank credit.  However, bank consolidation will reduce small business credit on if small banks enjoy an advantage in lending to small businesses.  We test the existence of a small bank cost advantage in small business lending by conducting the following simple test:  If such advantage exist, then we should observe small businesses in areas with few small banks to have less bank credit.  Using data on small business borrowers from the 1993 National Survey of Small Business Finance, we find that the probability of a small firm having a line of credit (a form of credit with few non-bank providers) from a bank does not decrease in the long run when there are fewer small banks in the area, although short-run disruptions may occur.  Nor do we find that firms in areas with few small banks are any more likely to repay trade credit late, suggesting that such firms are no more credit constrained than firms in areas with many small banks.  And last, we find that marginally creditworthy small firms and non-marginal firms are equally likely to borrow from small banks.  The unimportance of small banks appears to be the result of large banks' willingness to lend to small borrowers, suggesting that bank consolidation will have little effect on credit availability to small firms.

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