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The value to banks of small business lending

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  • Dmytro Holod
  • Joe Peek

Abstract

By estimating the market premium placed on the small business loan portfolios of banking organizations, this study provides direct evidence on the value to banks arising from relationship lending. Using data from the small business loan survey contained in the June bank call reports, we find that small commercial and industrial loans do, in fact, add value for smaller banking organizations, both in absolute terms and relative to the value contributed by larger commercial and industrial loans. Interestingly, the value-enhancing effect emanates primarily from the smallest loans, those with original values of $100,000 or less. On the other hand, small commercial real estate loans, being transactional rather than relationship in nature, do not contribute additional value to banking organizations relative to larger commercial real estate loans.

Suggested Citation

  • Dmytro Holod & Joe Peek, 2013. "The value to banks of small business lending," Working Papers 13-7, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:13-7
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    References listed on IDEAS

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    1. Jitka Pomenkova & Eva Klejmova & Zuzana Kucerova, 2019. "Cyclicality in lending activity of Euro area in pre- and post- 2008 crisis: a local-adaptive-based testing of wavelets," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 19(1), pages 155-175.
    2. Parnes, Dror, 2015. "Determining the economic value of ambiguous loan portfolios," Finance Research Letters, Elsevier, vol. 13(C), pages 148-154.

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    Bank loans; small business finance;

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