Do Small Banks Have an Advantage in Lending? An Examination of Small Business Lending Performance for Large and Small Banks

Abstract

Consolidation in the banking industry has sparked concern about the survival of small banks. However, if small banks are better at processing credit information than large banks, they should continue to survive in a competitive environment. We evaluate risk-adjusted commercial loan yields (gross yields less net charge-offs and the risk-free rate) at small and large banks for 1996 through 1999. We find that risk-adjusted yields fall as the proportion of small business loans (i.e., original amounts less than $1 million) increase. However, smaller banks earn greater risk-adjusted yields than larger banks. Our results suggest that small banks make better choices from the available small business loans. This finding is consistent with the notion that these banks have an information advantage in evaluating credit and adds to our understanding of the intermediation process.