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The evolving relationship between community banks and small businesses: evidence from the Surveys of Small Business Finances

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Author Info

  • Robin A. Prager
  • John D. Wolken

Abstract

This paper uses data from the Federal Reserve Board’s 1998 and 2003 Surveys of Small Business Finances (SSBFs) to examine the evolving relationship between community banks and small businesses. The SSBFs provide extensive data on the types of financial services used by small businesses and the sources of those services. These data allow us to answer a number of interesting questions regarding small business usage of community banks, including the following: To what extent do small businesses rely on community banks as providers of at least some financial services? What types of financial services are small businesses most likely to obtain from a community bank? What types of small businesses are most likely to obtain some or all of their financial services from a community bank? How have the answers to these questions changed between 1998 and 2003? In addition to providing detailed descriptions of the patterns of community bank usage observed in the data, we develop a simple reduced form model that uses both firm and local banking market characteristics to explain these patterns. We test a number of hypotheses regarding the extent to which community banks and larger banks differ with respect to the types of financial services provided to small businesses and the types of firms served. Finally, we discuss the implications of our findings for the future of community banking.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-60.

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Date of creation: 2008
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Handle: RePEc:fip:fedgfe:2008-60

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Related research

Keywords: Small business - Finance ; Community banks;

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References

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  1. Keeton, William R., 1995. "Multi-Office Bank Lending To Small Businesses: Some New Evidence," Proceedings: 1995 Regional Committee NC-207, October 16-17, 1995, Kansas City, Missouri 131493, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
  2. Robert DeYoung & William C. Hunter & Gregory F. Udell, 2003. "The past, present, and probable future for community banks," Working Paper Series WP-03-14, Federal Reserve Bank of Chicago.
  3. Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuram G. Rajan & Jeremy C. Stein, 2002. "Does Function Follow Organzizational Form? Evidence From the Lending Practices of Large and Small Banks," Harvard Institute of Economic Research Working Papers 1976, Harvard - Institute of Economic Research.
  4. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May.
  5. Robert DeYoung & Denise Duffy, 2002. "The challenges facing community banks: in their own words," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 2-17.
  6. Allen N. Berger & Gregory F. Udell, 2002. "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, Royal Economic Society, vol. 112(477), pages F32-F53, February.
  7. Allen N. Berger & Anil K. Kashyap & Joseph Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been," Center for Financial Institutions Working Papers 96-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
  8. Allen N. Berger & Anthony Saunders & Joseph M. Scalise & Gregory F. Udell, 1998. "The Effects of Bank Mergers and Acquisitions on Small Business Lending," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-007, New York University, Leonard N. Stern School of Business-.
  9. Marianne P. Bitler & Alicia M. Robb & John D. Wolken, 2001. "Financial services used by small businesses: evidence from the 1998 survey of small business finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 183-205.
  10. Jonathan Scott, 2004. "Small Business and the Value of Community Financial Institutions," Journal of Financial Services Research, Springer, vol. 25(2), pages 207-230, April.
  11. Traci L. Mach & John D. Wolken, 2006. "Financial services used by small businesses: evidence from the 2003 Survey of Small Business Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages A167-A195.
  12. Allen N. Berger & Seth D. Bonime & Lawrence G. Goldberg & Lawrence J. White, 2004. "The Dynamics of Market Entry: The Effects of Mergers and Acquisitions on Entry in the Banking Industry," The Journal of Business, University of Chicago Press, vol. 77(4), pages 797-834, October.
  13. Jayaratne, Jith & Wolken, John, 1999. "How important are small banks to small business lending?: New evidence from a survey of small firms," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 427-458, February.
  14. Berger, Allen N. & Rosen, Richard J. & Udell, Gregory F., 2005. "Does Market Size Structure Affect Competition? The Case of Small Business Lending," CEI Working Paper Series 2005-8, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  15. William R. Keeton, 1995. "Multi-office bank lending to small businesses: some new evidence," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 45-57.
  16. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  17. Scott E. Hein & Timothy W. Koch & S. Scott MacDonald, 2005. "On the uniqueness of community banks," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 15-36.
  18. Robert Avery & Katherine Samolyk, 2004. "Bank Consolidation and Small Business Lending: The Role of Community Banks," Journal of Financial Services Research, Springer, vol. 25(2), pages 291-325, April.
  19. Cole, Rebel A., 1998. "The importance of relationships to the availability of credit," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 959-977, August.
  20. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
  21. George W. Haynes & Charles Ou & Robert Berney, 1999. "Small business borrowing from large and small banks," Proceedings 776, Federal Reserve Bank of Chicago.
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Cited by:
  1. de la Torre, Augusto & Soledad Martinez Peria, Maria & Schmukler , Sergio L., 2008. "Bank involvement with SMEs : beyond relationship lending," Policy Research Working Paper Series 4649, The World Bank.

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