Do Banks Lend Where They Borrow? Local Small-Business Lending in the U.S.

Abstract

The percentage of out-of-market loan originations to small businesses, as measured by both amounts and number, have been trending upward over the past two decades. The percentage of out-of-market loan originations to small businesses, as measured by both amounts and number, declined when economic conditions are poor. During the crisis years of 2008-2011, the percentage of such originations fell significantly below the trend line, declining by about one-fourth from the pre-crisis period. Banks that were subject to regulatory stress tests responded by significantly reducing their out-of-market lending. Credit-card specialty banks originate close to 100 percent of their loans out-of-market, and account for about ten percent of the amount of out-of-market originations, but about 40 percent of the number of out-of-market originations. While this may not be surprising to knowledgeable observers of the U.S. banking industry, given that they typically have only one branch in one county, it highlights the importance of accounting for these banks when analyzing small-business loan originations.