The Evolution of Bank Lending to Small Business The Evolution of Bank Lending to Small Business

March 31, 1998

Lending to small firms traditionally has been a business served primarily by the banking industry, which has recently undergone substantial consolidation, in part stimulated by the relaxation of barriers to interstate mergers and interstate branching. As many banks grow in size and focus more on national and international markets, it is possible that some lines of business, including small business lending, may be less profitable for them than other activities that exploit more fully the advantages arising from economies of size and scope.

This article examines how consolidation, along with the use of credit-scoring models for lending, may be reflected in recent patterns of small business lending by banks. The authors find that the market for small business lending has been substantially influenced both by the wave of bank consolidations and by the adoption of efficiency-enhancing information technologies at banks. Using Call Report data, they show that the pattern of changes in small business lending following bank mergers is sensitive to the size of the banks involved, as well as to the degree to which the acquirer has chosen to specialize in small business lending.

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