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Changes in the banking system and small business lending

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Abstract

Since small businesses typically rely on small banks as their primary source of financing, there are concerns that the wave of bank consolidation of the 1990s may have reduced the availability of loans to small businesses in the US. Using a panel of state-level banking information over 1993–2002, this paper shows that the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994 reduced the number of small banks, but not the amount of small business lending. We also show that small banks are participating less in small business lending. These results imply that the bank-lending channel of the monetary transmission mechanism became less important in the US in the late 1990s as a result of more firms borrowing from large banks that are less sensitive to monetary shocks.

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Notes

  1. For a concise summary of the 1994 reform and its background, see Dick (2006), Kane (1996), and Matasar and Heiney (2002). The latter reference contains the full text of the RNA. A summary of the Riegle–Neal Act can also be found at the Library of Congress Thomas website under Public Law P.L. 103-325.

  2. See Kane (1996) for a more detailed discussion on the prevalence of interstate banking by MBHCs prior to the enactment of the RNA.

  3. Some large banks, and not only bank-holding companies, may operate in more than one state. For robustness, we follow Driscoll (2004), who identifies states that have banks with significant out of state lending (New York, California, Illinois). When we estimate the regressions without these states, the results are qualitatively similar to the ones obtained when all states are included. An explanation for this could be that small business lending is primarily local, even for large banks.

  4. Data are available at: http://www.chicagofed.org

  5. Commercial and industrial loans: Loans for commercial and industrial purposes are to sole proprietorships, partnerships, corporations, and other business enterprises, which are secured (other than by real estate) or unsecured, single payment or installment. Nonfarm nonresidential: Real estate loans are secured by business or industrial properties, hotels, motels, churches, hospitals, education and charitable institutions, dormitories, clubs, lodges, association buildings, recreational facilities, and similar properties.

  6. This follows the practice by Kashyap and Stein (1995, 2000).

  7. Alternative cutoffs, such as the 90th or 99th percentile, were also used, obtaining similar results.

  8. In a broader sense, we adopt a strategy to exploit cross-regional variations in government policies as a natural experiment. See Meyer (1995) for a discussion of the empirical approach.

  9. See Greene (1997) and Wooldridge (2002) for a discussion.

  10. In the SSBF of 1998, about 53% of small businesses surveyed used some form of commercial bank credit; the SSBF of 1993 found 59%. The SSBF collects information on small businesses (fewer than 500 employees) in the US.

  11. Unfortunately, the Commercial Bank and Bank-Holding Company Database does not contain information on affiliation. We therefore examined the names of the banks involved in the merger to determine the relationship between them. Generally, banks in mergers are deemed related if the first five letters of their names match. However, we made some exceptions to avoid classifying unrelated banks as affiliates (e.g., Bank of San Diego and Bank of La Costa). Exceptions are those beginning with “BANK OF” and “FIRST.” For those cases, we used nine letters for the former and seven letters for the latter (including space in both cases). While this method is not perfect, inspection of the resulting data suggests that it is reasonable. We found that from 1994 to 2000, 27.5% of mergers were deemed subsidiary consolidation.

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Authors and Affiliations

  1. Department of Economics, Kent State University, PO Box 5190, Kent, OH, 44242-0001, USA

    David Vera

  2. Crawford School of Economics and Government, The Australian National University, Canberra, ACT, 0200, Australia

    Kazuki Onji

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  1. David Vera
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  2. Kazuki Onji
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Correspondence to David Vera.

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Vera, D., Onji, K. Changes in the banking system and small business lending. Small Bus Econ 34, 293–308 (2010). https://doi.org/10.1007/s11187-008-9119-9

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  • DOI: https://doi.org/10.1007/s11187-008-9119-9

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