The consolidation of the banking industry and small business lending

Abstract

This paper examines the issue of the impact of the consolidation of the U.S. banking industry on the supply of bank credit to small businesses. It reviews the popular argument that bank mergers and acquisitions create larger institutions that may be less inclined to lend to small business. In particular, these institutions may lose their local community identity and refocus their franchises toward providing capital market services to large corporate clientele. Theoretical arguments that provide economic content to this view are synthesized. The paper then reviews the extant empirical literature which generally provides support for the contention that larger banks, and the merger of larger banks, are associated with a lower allocation of bank assets to small business lending. However, the empirical evidence also suggests that increased lending by other banks in the local market, as well as other factors, may likely offset reductions in small business lending by the consolidating institutions.