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Small business lending: challenges and opportunities for community banks

Author

Listed:
  • Jagtiani, Julapa

    (Federal Reserve Bank of Philadelphia)

  • Lemieux, Catharine

    (Federal Reserve Bank of Chicago)

Abstract

The recent decline in small business lending (SBL) among U.S. community banks has spurred a growing debate about the future role of small banks in providing credit to U.S. small businesses. This paper adds to that discussion in three key ways. First, this research builds on existing evidence, suggesting that the decline in SBL by community banks is a trend that began at least a decade before the financial crisis. Second, the authors show that in the years preceding the crisis, small businesses increasingly turned to mortgage credit to fund their operations. Finally, this paper illustrates how community banks face an increasingly dynamic competitive landscape, including the entry of deep-pocketed alternative nonbank lenders using technology to find borrowers and to underwrite loans, often using unconventional lending practices. Although these lenders may pose a competitive threat to community banks, the authors explore emerging examples of partnerships and alliances among community banks and nonbank lenders.

Suggested Citation

  • Jagtiani, Julapa & Lemieux, Catharine, 2016. "Small business lending: challenges and opportunities for community banks," Working Papers 16-8, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:16-8
    as

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    References listed on IDEAS

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    1. Arthur B. Kennickell & Myron L. Kwast & Jonathan Pogach, 2016. "Small Businesses and Small Business Finance during the Financial Crisis and the Great Recession: New Evidence from the Survey of Consumer Finances," NBER Chapters,in: Measuring Entrepreneurial Businesses: Current Knowledge and Challenges, pages 291-349 National Bureau of Economic Research, Inc.
    2. DeYoung, Robert & Frame, W. Scott & Glennon, Dennis & McMillen, Daniel P. & Nigro, Peter, 2008. "Commercial lending distance and historically underserved areas," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 149-164.
    3. Chakraborty, Atreya & Hu, Charles X., 2006. "Lending relationships in line-of-credit and nonline-of-credit loans: Evidence from collateral use in small business," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 86-107, January.
    4. Puri, Manju & Rocholl, Jörg & Steffen, Sascha, 2011. "Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects," Journal of Financial Economics, Elsevier, vol. 100(3), pages 556-578, June.
    5. Scott Shane & Ann Marie Wiersch, 2013. "Why small business lending isn’t what it used to be," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
    6. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
    7. Jagtiani, Julapa & Kotliar, Ian & Maingi, Ramain Quinn, 2014. "The evolution of u.s. Community banks and its impact on small business lending," Working Papers 14-16, Federal Reserve Bank of Philadelphia, revised 01 Oct 2015.
    8. Robert DeYoung & W. Frame & Dennis Glennon & Peter Nigro, 2011. "The Information Revolution and Small Business Lending: The Missing Evidence," Journal of Financial Services Research, Springer;Western Finance Association, vol. 39(1), pages 19-33, April.
    9. Kennickell, Arthur B. & Kwast, Myron L. & Pogach, Jonathan, 2015. "Small Businesses and Small Business Finance during the Financial Crisis and the Great Recession: New Evidence From the Survey of Consumer Finances," Finance and Economics Discussion Series 2015-39, Board of Governors of the Federal Reserve System (US).
    10. Robin A. Prager & John D. Wolken, 2008. "The evolving relationship between community banks and small businesses: evidence from the Surveys of Small Business Finances," Finance and Economics Discussion Series 2008-60, Board of Governors of the Federal Reserve System (US).
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    Citations

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    Cited by:

    1. Mester, Loretta J. & Hughes, Joseph P. & Jagtiani, Julapa, 2016. "Is Bigger Necessarily Better in Community Banking?," Working Papers (Old Series) 1615, Federal Reserve Bank of Cleveland.
    2. Jagtiani, Julapa & Kotliar, Ian & Maingi, Raman Quinn, 2016. "Community bank mergers and their impact on small business lending," Journal of Financial Stability, Elsevier, vol. 27(C), pages 106-121.
    3. Anil Savio Kavuri & Alistair Milne, 2019. "FinTech and the future of financial services: What are the research gaps?," CAMA Working Papers 2019-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

    More about this item

    Keywords

    Small business lending; Online lending; Lending technology; Shadow banking; Community banks; Large and small banks;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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