The Evolution of U.S. Community Banks and its Impact on Small Business Lending

Abstract

There have been increasing concerns about the potential of larger banks acquiring community banks and the declining number of community banks, which would significantly reduce small business lending (SBL) and disrupt relationship lending. This paper examines the roles and characteristics of U.S. community banks in the past decade, covering the recent economic boom and downturn. We analyze risk characteristics (including the confidential ratings assigned by bank regulators) of acquired community banks, compare pre-and post-acquisition performance, and investigate how the acquisitions have affected SBL. Contrary to concerns, our regression analysis shows that the overall amount of SBL increases more after a merger when a large bank acquires a community bank. Data suggest an overall (regardless of mergers) declining SBL trend for all size groups. In fact, the decline in the SBL ratio has been more severe among community banks on average, relative to large banks. Community banks that were merged during the financial crisis were less healthy than in earlier periods. Our results indicate that mergers involving community bank targets over the past decade have enhanced the overall safety and soundness of the banking system without adversely impacting SBL. Supervisory policies that discourage mergers between community banks and large banks could potentially result in an unintentional dampening effect on the supply of SBL.

Is Bigger Necessarily Better in Community Banking?

“…More recent studies, using data after the financial crisis, such as Berger, Goulding, and Rice (2014) and Berger, Cerqueiro, and Penas (2014), provide supporting evidence of the increasing roles of large banks in lending to small business and start-up firms. In addition, Jagtiani, Kotliar, and Maingi (2015) investigate bank mergers announced during the period 2000-2012 and find no adverse impact on overall SBL even after the community bank merger targets became part of the large acquiring banks. In fact, they find that post-merger, the merged banking firm's SBL tended to exceed the pre-merger SBL of the target and acquirer; i.e., SBL increased after community bank targets became larger via the merger.…”