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Small business credit availability: how important is size of lender?

  • Joe Peek
  • Eric S. Rosengren

The recent relaxation of restrictions on interstate banking and branching, as well as the likely relaxation of Glass-Steagall restrictions, should encourage significant consolidation in the banking industry. Larger lenders, diversified across regions and products, will undoubtedly be less susceptible to adverse economic shocks that have buffeted the banking industry over the past decade. However, as small banks with a small business loan emphasis are absorbed into larger, more diversified lenders, which tend to focus much less on small business lending, credit availability to bank-dependent small business borrowers should be a major public policy concern. In New England, the evidence indicates that many large acquirers have chosen not to maintain the small business loan portfolios of their smaller target banks. This reduction in small business lending as a result of acquisitions indicates that many banks have little interest in maintaining the historical lending relationships fostered by the small target banks. As consolidation reduces the number of small banks that focus on small business loans, some niches will be created that can be served by de novo entry, although the evidence suggests that de novo entry is unlikely to quickly fill any major voids in small business lending.

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 95-5.

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Date of creation: 1995
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Publication status: Published in Universal Banking Financial System Design Reconsidered (A. Saunders and I. Walter, eds.) 628-55 (1996).
Handle: RePEc:fip:fedbwp:95-5
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  1. Joe Peek & Eric S. Rosengren, 1995. "Banks and the availability of small business loans," Working Papers 95-1, Federal Reserve Bank of Boston.
  2. Allen N. Berger & Gregory F. Udell, 1994. "Lines of credit and relationship lending in small firm finance," Proceedings 52, Federal Reserve Bank of Chicago.
  3. John H. Boyd & Stanley L. Graham, 1991. "Investigating the banking consolidation trend," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-15.
  4. Joe Peek & Eric Rosengren, 1993. "Bank regulation and the credit crunch," Working Papers 93-2, Federal Reserve Bank of Boston.
  5. Cornett, Marcia Millon & Tehranian, Hassan, 1992. "Changes in corporate performance associated with bank acquisitions," Journal of Financial Economics, Elsevier, vol. 31(2), pages 211-234, April.
  6. Gregory E. Elliehausen & John D. Wolken, 1990. "Banking markets and the use of financial services by small and medium- sized businesses," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 801-817.
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