The Impact of Bank Consolidation on Small Business Credit Availability

The statements, findings, conclusions, and recommendations found in this study are those of the authors and do not necessarily reflect the views of the Office of Advocacy, the United States Small Business Administration, or the United States Government. Executive Summa ry This research examines the implications to the amount of credit available to small businesses from the rapid and pervasive changes in the banking sector. Specifically, large banks have grown as a share of the banking market, whether measured by the share of banking deposits or by the share of small business loans. This raises the concern that small business credit, which traditionally has been the province of small banks, will become significantly restricted. Using the Survey of Small Business Finance (Survey), the research presented here examines this possibility. Our research methodology has been to use the nine Census regions, further divided into urban and rural areas, to define a banking market. We then employ the individual firm data on small firms from the Survey to ascertain the extent to which credit access varies as attributes of the credit market varies. We believe our cross-section analysis over regions can be used to extrapolate to changes over time in banking market structure, as each region contains a different banking market as measured by the extent to which large banks are important, and the extent to which large banks participate in the small business lending market. We find that credit access has been significantly reduced by banking consolidation, although actual credit balances have fallen by less. We believe this suggests that small businesses, especially those to which relationship lending is important, have a lower likelihood of using banks as a source of credit. Once these firms use a bank, however, it may be that the pricing advantages of large banks allow greater credit per borrower to be obtained. A second important attribute of our results is that we also find that small businesses have increasingly turned to non-bank sources of financing to provide credit access. Our statistical analysis finds that small businesses receive less credit on average in regions with a large share of deposits held by the largest banks, irrespective of how debt is measured. Notable details about this primary finding are that: *When access to credit is measured by credit limits, reductions in lending in response to greater market share by large banks is larger than when credit access is …