Does “small bank advantage” really exist? Evidence from China

Abstract

A small bank advantage indicates that small banks have a comparative advantage in granting relationship lending to small- and medium-sized enterprises (SMEs). This paper used loan data from Chinese SMEs to test this hypothesis during a financial crisis and during non-crisis times. Compared with large banks, small banks are only superior in offering SMEs relationship lending through a pre-existing relationship, regardless of the financial crisis. Without pre-existing relationships, small and large banks have no advantage in providing loans to SMEs. We also find that there is no significant positive association between bank size and whether an SME changes its lending bank or the number of its financing sources, regardless of whether there is currently a financial crisis. The results indicate that small banks fail to maintain a strong relationship with SMEs, possibly because of the hold-up problem resulting from relationship lending.