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Universal banking and the future of small business lending


  • Allen N. Berger
  • Gregory F. Udell


Many argue that one category of bank clientele may have been lost in the rapidly changing structure of the U.S. banking industry small business borrowers. One reason for the concern over small business credit availability is the argument that small business has fallen victim to the increasing size and complexity of banking organizations. The proliferation of new bank product lines may have forced an internal competition for scarce capital and managerial attention in which the small business component of banking may have been losing ground. The recent wave of bank acquisitions may have had an equally powerful impact. Acquiring banks have often imposed their own idiosyncratic policies and procedures, stripping acquired banks of their autonomy and sometimes their management. More importantly, these critics argue, the process may have robbed acquired banks of their community identity and their appetite for loans to small local businesses. Arguably, these forces have had little downside cost for consumers who demand relatively generic financial services and who increasingly buy these services in national markets with substantial nonbank competition. They also would have little downside cost for large and middle-market businesses who demand the breadth of service that the more universal-like money center banks and the super-regional banks offer, and who benefit from access to alternative sources of funding such as the public securities market and the private placement market. However, for the small business customer the story is different. Small local companies may need an individual bank that has an understanding of the local business market and is staffed by personnel with local roots. These are said to be necessary conditions for the establishment and the continuation of a banking relationship and the tailoring of services to meet the idiosyncratic needs of the small firm. As banking organizations have become larger and more complex they may have reduced their supply o
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Suggested Citation

  • Allen N. Berger & Gregory F. Udell, 1995. "Universal banking and the future of small business lending," Finance and Economics Discussion Series 95-21, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:95-21

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    Bank loans; Small business;


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