Do small businesses still prefer community banks?

Abstract

We formulate and test hypotheses about the role of bank type -small versus large, single-market versus multimarket, and local versus nonlocal banks -in banking relationships. The conventional paradigm suggests that "community banks" -small, single-market, local institutions -are better able to form strong relationships with informationally opaque small businesses, while "megabanks" -large, multimarket, nonlocal institutionstend to serve more transparent firms. Using the 2003 Survey of Small Business Finance (SSBF), we conduct two sets of tests. First, we test for the type of bank serving as the "main" relationship bank for small businesses with different firm and owner characteristics. Second, we test for the strength of these main relationships by examining the probability of multiple relationships and relationship length as functions of main bank type and financial fragility, as well as firm and owner characteristics. The results are often not consistent with the conventional paradigm, perhaps because of changes in lending technologies and deregulation of the banking industry.JEL Classification Numbers: G21, G28, G34

Is Relationship Lending Still a Mixed Blessing? A Review of Advantages and Disadvantages for Lenders and Borrowers

“…The SME sector is of strategic importance for large banks, therefore these institutions do not only provide different transaction lending technologies to SMEs, but they benefit from economies of scale and scope due to much more advanced and sophisticated risk management systems. Similar results are found by Berger et al (2014) for the USA market. Berger et al (2011) by using data from a survey on a sample of USA banks of different size point out that small banks do not necessarily rely only on relationship lending.…”

Influence of internet and social media presence on small, local banks’ market power

“…The latter are particularly formidable opponents for two reasons. First, the large organization, thanks to technological changes, as suggested by Berger et al (2014), acquired tools necessary to challenge the role of SLB in financing small business. Second, large credit institutions possess resources required for fast, early and successful implementation of new distribution channels while SLBs, due to limited financial means, are frequently constrained to follow more cautious strategies with regard to I&SMP.…”

“…However, as Berger, Goulding, and Rice (2014) note, the changes in lending technologies (credit scoring, lending against fixed assets collateral) made it much easier for large banks to serve local, opaque firms. Therefore, when SLBs compete locally mainly with large commercial banks, their decisions regarding I&SMP may by driven by the competitive threats coming from much more powerful credit institutions.…”

Does Bank Diversification Improve Output Growth? Evidence from the Recent Global Crisis

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