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Small Business Lending and Bank Profitability

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Author Info

  • James Kolari

    (Texas A&M University)

  • Robert Berney

    (Washington State University and US Small Business Administratio)

  • Charles Ou

    (US Small Business Administration)

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    Abstract

    In theory commercial banks exist to resolve asymmetric information problems in credit markets. Because small business firms have much greater information problems than large firms, it is not surprising that they depend almost entirely on banks for external finance needs. Unfortunately, little is known either in academic literature or banking practice about the profitability of small business credit (and related information) services. The present study employs recently available business loan size information from the Call Reports for all insured U.S. commercial banks in 1994 and 1995 to examine the relationship between bank profits and small business credit. Regression analyses are conducted using the rate of return on assets and business loans less than $250,000, in addition to a number of variables that proxy various dimensions of risk that potentially could influence this relationship. Due to the fact that small and large banks differ considerably in their lending activities, separate analyses are conducted for five asset size groups. In brief, we find that, while small business loans likely have a negligible effect the profits of large banks, they tend to increase the profitability of small banks over time, holding constant various bank risk characteristics.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-1996-05-1-b-kolari.pdf
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    Bibliographic Info

    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Entrepreneurial and Small Business Finance.

    Volume (Year): 5 (1996)
    Issue (Month): 1 (Spring)
    Pages: 1-15

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    Handle: RePEc:pep:journl:v:5:y:1996:i:1:p:1-15

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    Postal: 24255 Pacific Coast Hwy, Malibu CA
    Web page: http://bschool.pepperdine.edu/jef
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    Related research

    Keywords: Bank ; Lending; Small business Lending; Borrowing; Bank Profitability; Profitability;

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    References

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    1. Allen Berger, 1994. "The Relationship Between Capital and Earnings in Banking," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 94-17, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    3. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers, University of California at Berkeley 41, University of California at Berkeley.
    4. Hannan, Timothy H, 1991. "Foundations of the Structure-Conduct-Performance Paradigm in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(1), pages 68-84, February.
    5. Campbell, Tim S & Kracaw, William A, 1980. " Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, American Finance Association, vol. 35(4), pages 863-82, September.
    6. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    7. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(1), pages 29-39, January.
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