Academic journal article Journal of Small Business Management

The Effects of Foreign Ownership of U.S. Banks on the Availability of Loanable Funds to Small Businesses

Academic journal article Journal of Small Business Management

The Effects of Foreign Ownership of U.S. Banks on the Availability of Loanable Funds to Small Businesses

Article excerpt

While the advent of financial deregulation and globalization of financial markets has created additional sources of loanable funds for many large business organizations, small businesses are still relegated to trade credit and bank loans as their primary source of operating funds (Curran 1986, Gitman 1988). Any change that is likely to disrupt these sources of funds for small businesses is particularly worrisome to them. One of the effects of increased internationalization that has potentially significant outcomes for American small business is the existence of large numbers of U.S. banking facilities owned by foreign interests (Goldberg and Saunders 1981a, Meinster and Elyasiani 1988). These foreign interests have opened or acquired operating units in the U.S. in three different formats; agencies, branches, and subsidiaries (Ogilvie 1980, Walker 1983). The purpose of the agency and branch forms of foreign banks has been to provide services for their home country businesses operating within the U.S. and to obtain direct access to U.S. exchange and security markets (Hultman and McGee 1989, Idaszak 1990). On the other hand, subsidiary banks operate as full-fledged, full-service commercial banks that are chartered under U.S. banking laws and regulated identically to U.S. banking units (Goldberg and Saunders 1981b, Park and Zwick 1985).(1) As such, these subsidiary banks compete on both sides of their balance sheets. Therefore, they are likely to have a significant effect on the competitive banking environment in their respective communities, particularly in the areas of direct customer/client relationships and the availability of loanable funds. Both of these issues are of extreme importance to the operation and success of most small businesses since commercial banks provide a broad array of services to virtually every small business. Banks also rank as either the first or second most important source of external operating funds for small business (Siropolis 1990, Van Auken and Carter 1989). For example, studies done by the National Federation of Independent Business in 1988 and 1990 found that 76 percent of all operating small business firms have utilized bank loans at some point during their existence. Sixty-five percent of these small businesses report they are currently using some form of bank credit. Likewise, these studies suggest that from 45 to 52 percent of all small business firms needed at least some portion of their original start-up funding from commercial bank loans (Dennis, Dunkelberg, and Van Hulle 1988; Cooper 1990).

The data suggest that the ability to obtain commercial bank loans is a major component of the operating environment of most U.S. small businesses. This study was designed to assess the impact that foreign ownership of U.S. banking facilities is likely to have on the availability of loans for small businesses. While the issue of the potential changes in the customer/client relationship that could result from foreign bank ownership warrants further investigation, it is beyond the scope of this study.

Several major elements of the foreign ownership issue underscore the potential significance that this could have for U.S. small businesses. First, most subsidiary banks fall under foreign ownership by acquisition rather than "start up" (Walker 1983). Second, as a practical matter, small businesses obtain more than 96 percent of their bank loans from local banks (Robichaux 1991, U.S. Small Business Administration 1990). This means not only that the banks are important but that small businesses are limited to the commercial banks domiciled within their own operating region (Schlesinger, Unsal, and Zaman 1987). Third, from the banks' perspective, small businesses are as critical to their success as is the reverse. For example, current estimates indicate that in excess of 50 percent of all outstanding bank loans to the U.S. commercial sector are to small businesses (U.S. Small Business Administration 1990). …

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