Academic journal article Journal of Economics and Finance

Are Commercial Bank Lending Propensities Useful in Understanding Small Firm Finance?

Academic journal article Journal of Economics and Finance

Are Commercial Bank Lending Propensities Useful in Understanding Small Firm Finance?

Article excerpt

Published online: 22 June 2011

© Springer Science+Business Media, LLC 2011

Abstract We consider recent criticism by Berger et al. (J Bank Finance 31:11- 33, 2007) of the use of commercial bank lending propensities (e.g., small business loans/total assets) as research tools. We use 2SLS cross sectional regressions with bank fixed effects to examine the relationship between small business lending and bank size. Our results indicate that the propensity to lend to small businesses declines as bank size increases, and the growth in small business lending does not keep pace with the growth in bank size. An increase in bank asset size from $1 billion to $100 billion reduces the ratio of small business loans to total loans and leases by 28 percentage points. Contrary to Berger and Black (2007) we find that most small business loans aremade by small banks. For 1993 to 2006 as a whole, small banks (those under $1 billion) accounted for only 14.1% of total deposits and 9.7% of total banking assets, but they accounted for 28.4% of small business loans outstanding. This is consistent with the pattern shown by lending propensities. We conclude that these propensities remain very useful tools in research on small firm finance.

Keywords Small Firm Finance . Bank Mergers . Commercial Banking

JEL Classification G21 . G28

(ProQuest: ... denotes formulae omitted.)

1 Introduction

Businesses with less than 20 employees accounted for 79.5% of net job creation in the United States from 1990 to 2003 (Edmiston 2007). The importance of small business in the American economy, as well as the role of banks in facilitating small business development, has motivated researchers to explore bank characteristics that are conducive to small business lending (e.g. Berger and Udell 1995; Peek and Rosengren 1998). With bank assets being consolidated even further at larger banks as a result of the financial crisis, the ongoing issue of large banks potentially being less willing to lend to small firms takes on increasing importance.

Many researchers examine the propensity of commercial banks to lend to small firms and define this propensity as the ratio of small business loans to total assets (see, for example, Akhavein et al. 2005; Berger et al. 1998; Frame et al. 2004; Laderman 2008 and Strahan and Weston 1998). However, recent studies question the importance of lending propensities. Berger et al. (2007) suggest that the ratio of small business loans to total assets may be lower at large banks because of greater growth opportunities causing the denominator to expand rather than the numerator to contract. Additionally, Berger and Black (2007) use the Survey of Small Business Finance to suggest that most lending to small firms is done by large banks. However, this data source is probably not representative of the population of all small firms. Very small firms (the ones most likely to be financed by small banks) are possibly less likely to participate. More importantly, the survey does not account for the firms that have gone out of business, for example due to interrupted lines of credit. Based on a more comprehensive data source, the bank call report data filed with federal regulators by all banks, we analyze the relationship between lending propensities and bank asset size.

To address the "denominator effect" identified by Berger et al. (2007), we use the ratio of small business loans to total loans and leases as the propensity of commercial banks to lend to small businesses. This ratio excludes investment assets, trading account assets and other assets that would be a more significant portion of large bank balance sheets than small bank balance sheets. More importantly, we estimate a twostage least squares regression with bank fixed effects for 5,537 banks for 1993-2006 (a total of 32,215 bank-year observations) to help us understand the supply curve for small business loans. Our results show that the supply of small business loans does not keep pace with the growth in total assets. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.