Do Small Banks have an Advantage in Lending? An Examination of Risk-Adjusted Yields on Business Loans at Large and Small Banks

Carter, David A.; McNulty, James E.; Verbrugge, James A.

doi:10.1023/b:fina.0000020663.21079.d2

Cited by 82 publications

(65 citation statements)

References 29 publications

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“…Studies that examined the effects of the lending bank size on small business loan pricing generally found that large banks tend to charge lower interest rates and earn lower risk-adjusted yields on small business loans than small banks (e.g., Hannan 1991, 1997, Berger and Udell 1996, Carter, McNulty, and Verbrugge 2004, Berger 2006. 4 These findings are often used to support the argument that large banks are generally disadvantaged in lending to opaque small businesses.…”

Section: White 2004)mentioning

confidence: 99%

Does market size structure affect competition? The case of small business lending

Berger¹,

Rosen²,

Udell³

2007

Journal of Banking & Finance

228

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Forthcoming, Journal of Banking and FinanceMarket size structure refers to the distribution of shares of different size classes of local market participants, where the sizes are inclusive of assets both within and outside the local market. We apply this new measure of market structure in two empirical analyses of the U.S. banking industry to address concerns regarding the effects of the consolidation in banking. Our quantity analysis of the likelihood that small businesses borrow from large versus small banks and our small business loan price analysis that includes market size structure as well as conventional measures yield very different findings from most of the literature on bank size and small business lending. Our results do not suggest a significant net advantage or disadvantage for large banks in small business lending overall, or in lending to informationally opaque small businesses in particular. We argue that the prior research that excluded market size structure may be misleading and offer some likely explanations of why our results differ. JEL Classification Numbers: G21, G28, G34, L11

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Section: White 2004)mentioning

confidence: 99%

Does market size structure affect competition? The case of small business lending

Berger¹,

Rosen²,

Udell³

2007

Journal of Banking & Finance

228

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“…Bank profitability is typically used as a control variable to capture any link between bank performance and the local supply of credit (Carter et al, 2004). …”

Section: Iiib2 Explanatory Variables -Other Bank Market Characterimentioning

confidence: 99%

“…The balance of the empirical evidence suggests that the strength of the bank-borrower relationship is positively related to credit availability and credit terms such as loan interest rates and collateral requirements (e.g., Rajan, 1994, 1995;Berger and Udell, 1995;Cole, 1998;Elsas and Krahnen, 1998;Harhoff and Körting 1998a). 4 This research has also investigated the propensity of different types of banks to provide relationship lending with the general conclusion being that smaller domestic banks may have comparative advantage in delivering relationship lending (e.g., Hannan, 1991;Haynes, Ou, and Berney 1999;Stein, 2002;Berger and Udell, 2002;Haynes, Ou, and Berney, 1999;Berger and Udell, 1996;Berger, 2004;Carter et al, 2004;Cole, Goldberg and White, 2004;Carter and McNulty, 2005;Berger et al, 2005).…”

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confidence: 99%

Bank Market Power and SME Financing Constraints

2006

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Theoretical models of lending and industrial organization theory predict that firm access to credit depends critically on bank market structure. However, empirical studies offer mixed results. Some studies find that higher concentration is associated with higher credit availability consistent with the information hypothesis that less competitive banks have more incentive to invest in soft information. Other empirical studies, however, find support for the market power hypothesis that credit rationing is higher in less competitive bank markets. This study tests these two competing hypotheses by employing for the first time a competition indicator from the Industrial Organization literature -the Lerner index -as an alternative to traditional measures of concentration. We test the information and the market power hypotheses using alternative measures and firm borrowing constraints. We find that the results are sensitive to the choice between IO margins and traditional concentration measures. In particular, the HHI seems to support the information hypothesis while the Lerner index supports the market power hypothesis. The Lerner index, however, is found to be a more consistent indicator of market power across different measures of financing constraints. Moreover, the Lerner index is found to exhibit the larger marginal effect on the probability that a firm is financially constrained among a large set of firm level, bank market and environmental control variables. Our results are robust to alternative measures of financial constraints and cast doubt on the validity of relying on concentration measures as proxies of competition in corporate lending relationships (247 words).

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“…Studies based on relationship lending suggest that small firms that engage in long-term relationships with their banks can overcome the asymmetric information problem (Carter et al 2004;Berger, Udell 2006). However, information generation through relationship lending is costly and, consequently, banks are shy to lend to SMEs (Beck, De La Torre 2007).…”

Section: Introductionmentioning

confidence: 99%

Collateral Requirements for Sme Loans: Empirical Evidence From the Visegrad Countries

Rahman

Belás

Klieštik

et al. 2017

Journal of Business Economics and Management

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Abstract. The purpose of this paper is to examine the determinants of collateral for small and medium enterprises (SMEs) in the context of Visegrad countries: Czech Republic, Slovak Republic, Hungary and Poland. The data set for this paper was obtained from the Business Environment and Enterprise Performance Survey (BEEPS), which was conducted by the World Bank and the European Bank for Reconstruction and Development (EBRD) from 2012-2014. A binary logistic regression model with different specifications was employed to examine the effect of independent variables on the incidence of collateral. The results show that risky borrowers need to pledge collateral and the reduction of asymmetric information can lower the incidence of collateral for SMEs. Moreover, we find that female borrowers are more likely to pledge collateral than male borrowers are. The results also suggest that loans with a longer maturity are more likely to be collateralized than short-term loans. We find evidence that bank-borrower proximity can alleviate the incidence of collateral whereas bank concentration may increase collateral requirements. Policy makers may consider these results to implement policies that can promote bank competition and can lower collateral requirements for female borrowers. The paper contributes to the ongoing debate on the determinants of collateral.

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Do Small Banks have an Advantage in Lending? An Examination of Risk-Adjusted Yields on Business Loans at Large and Small Banks

Cited by 82 publications

References 29 publications

Does market size structure affect competition? The case of small business lending

Does market size structure affect competition? The case of small business lending

Bank Market Power and SME Financing Constraints

Collateral Requirements for Sme Loans: Empirical Evidence From the Visegrad Countries

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