Bank Consolidation and Soft Information Acquisition in Small Business Lending

Abstract

We empirically examine the impact of bank consolidation on bankers' acquisition of soft information about borrowers. Using a dataset of small businesses, we found that bank mergers have a negative impact on soft information acquisition by small banks while those by large banks that have less interest in acquiring soft information irrespective of mergers have no impact.Detailed analyses of the post-merger organizational restructuring show that the measures of an increase in organizational complexity have a negative and significant impact on soft information acquisition by small banks, while the measures of cost-cut do not have any significant impact on soft information acquisition. This result implies that the increase in organizational complexity by bank mergers hindered soft information acquisition, which is consistent with Stein's prediction [2002, J. Fin.] on the comparative advantage of simple and flat organizations in acquiring and processing soft information.

Hidden gems and borrowers with dirty little secrets: Investment in soft information, borrower self-selection and competition

“…In addition, upgrades based on soft information are less likely in years with a merger between two (or more) savings banks, consistent with some loss of soft information of merged banks and the previous literature (see e.g. most recently Ogura and Uchida, 2012).…”

The Objective Function of Government-Controlled Banks in a Financial Crisis

“…Further analyses show that this result is driven by both the weak relationship between large banks and SMEs, which has been recognized in the existing literature (e.g., Cole et al, 2004;Berger et al, 2005;Uchida et al, 2008;Nemoto et al, 2011;Ogura and Uchida, 2014), and the crowding out by the surge in loan demand for large banks from large corporations that were temporarily shut out of the securities market in the crisis. The former factor is consistent with the welfare-maximizing behavior in the above theoretical prediction.…”

“…Many existing studies suggest that the information on whether the main bank is a large bank can work as a proxy for the weakness of a main-bank relationship. The theory suggests that a large bank with a more centralized lending decision mechanism is not competent in utilizing the soft information that is required for relationship banking (e.g., Stein, 2002), and several empirical studies show supportive evidence for this (e.g., Cole et al, 2004;Berger et al, 2005;Uchida et al, 2008;Nemoto et al, 2011;Ogura and Uchida, 2014). Typical large banks in of the relationships of large banks with SMEs are also consistent with the significantly lower main-bank share when the main bank is a large bank in Figure 2 and the higher probability of a main-bank switch at large banks in Table 5.…”

Banks, Regions and Development After the Crisis and Under the New Regulatory System

“…In the Nineties a great number of studies have analyzed the effects of bank size and consolidation on small business lending. 10 Overall, this literature shows that large banks tend to allocate a smaller share of their assets to small business lending and to rely more on hard-information lending criteria than small, local banks (Berger et al 1995(Berger et al , 2005Cole and Goldberg, 2004;Scott 2004;Ogura and Uchida 2014). This is to confirm that large banks are at a competitive advantage in supplying standardized products and underwriting loans with large companies.…”