Nonbanks Gain in Small Business; Bank Merger Scrutiny Excessive?

Article excerpt

Commercial banks don't have a lock on the small-business loan market, a Federal Reserve Board study indicates.

And that may be good news for banks, in a roundabout way. As evidence that commercial banks may have lost their dominance in lending to firms with fewer than 500 employees, the Fed study adds fuel to one of the raging controversies in bank merger policy.

Preservation of local small-business credit has been one of the principal concerns of the Federal Reserve Board and the Justice Department in examining proposed mergers. In some cases, the Justice Department has held up antitrust clearance until small- business lending commitments could be assured.

Some observers, arguing on behalf of banks seeking or likely to apply for merger approvals, say that it's time for the feds to ease up.

The recent Federal Reserve study, based on a 1993 sampling of 5,300 small businesses and published in the board's July 1995 bulletin, said 41% of the companies obtained credit lines, loans, and leases from depository institutions. Isolating commercial banks, their share was 37%.

But 19% got credit from nondepository providers such as finance companies, leasing companies, and brokerage firms, and 14% went to "nonfinancial suppliers" such as family members, other businesses, and government agencies.

A full 45% of small businesses did not borrow from any of these sources. Only among firms with at least 20 employees, or with annual sales of at least $2.5 million, did as many as eight out of 10 take out credit. About seven out of 10 in those categories were bank borrowers, more than 30% went to nondepositories, and 15% to 20% borrowed from other sources. (Percentage totals exceed 100 because many companies have multiple lenders.)

If banks are far from being the sole source of small-business credit, and if a bank merger would therefore not affect the overall loan availability, perhaps federal antitrust scrutiny need not be so tough.

Meanwhile, banks have plenty of room for market-share improvement.

"Small-business lending was purportedly the last bastion of bank dominance," H. Rodgin Cohen, the prominent bank lawyer and partner at Sullivan & Cromwell in New York, said last month at the American Bar Association's annual convention in Chicago.

While antitrust authorities may be assuming that a bank merger makes the small-business market less competitive, Mr. Cohen said, "it is actually a multiple-source market."

Some of those sources are aggressive commercial banks. Mr. Cohen pointed out that in the competitive analysis of small-business lending in Portland, Ore., and Seattle, which are affected by U.S. Bancorp's merger with West One Bancorp, NationsBank and Bank One had bigger shares than some local institutions.

"Commercial customers are no longer restricted to nearby branch locations," he added. "Now out-of-market banks compete."

The bad news for banks, if the nonbank trend continues, is that small business could go the way of other former industry strongholds like the large-corporate loans that have given way to direct borrowing from the commercial paper market.

On the positive side, 95% of small businesses have "liquid asset accounts," such as checking and savings, and 86% of them go to commercial banks, compared with 4% for nondepositories. Thrifts and credit unions register 12%.

Some 35% of the firms obtain cash management and other financial management services, and commercial banks claim 26%. Among companies with 100 to 500 employees, those percentages rise to 76% and 67%.

Still, the Fed data could reopen some arguments about small- business lending's centrality in antitrust analysis.

Its status was defended in October 1990, when the Federal Reserve Bulletin reported on the small-business banking survey of 1988-89. "Local commercial banks are still the main suppliers for most of the financial services used by small and medium-sized businesses," the article said. …