A comparative analysis of the US and EU retail banking markets - Wsbi

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6.2.3.1.2 Lenders to small businesses in the US In the US, community banks – which are largely small to medium sized 326 locally or regionally based banks – are recognised as being one of the main providers of finance to small businesses in the US 327 . Community banks are savings banks, savings and loan associations, cooperative banks and commercial banks. Researchers typically treat commercial and industrial loans over $1 million in size as loans to large businesses and loans of $1 million or less as loans to small businesses. According to this definition, community banks accounted for only 4% of large business loans in June 2002 but 33% of small business loans – much larger than their share of deposits (19%) or their share of assets (15%). For very small business loans, those of $100,000 or less, the share of community banks was even higher, at 36% 328 . Of the community banks that offer credit to small businesses, it would appear that savings institutions, defined as savings banks and savings and loan associations, provide much less credit to small businesses than commercial banks do 329 . Only 3.4% of small businesses obtained credit from a savings bank or a savings and loan association. Commercial banks in the US are the leading providers of credit to small businesses, supplying credit lines, loans, and leases to slightly more than two-thirds of small firms that obtained a traditional form of credit from any source 330 . Among non-depositories, finance companies supplied credit to 13.8% of small firms, leasing companies to 6.8%, and family or other individuals to 6.1% 331 . 6.2.3.1.3 The challenges to small businesses seeking financing in the US Lending to small businesses is generally considered riskier and more costly than lending to larger firms. Small businesses are much more affected by swings in the economy and have a much higher failure rate than larger operations. In addition, lenders historically have had more difficulty determining the creditworthiness of applicants for some small business loans. Small firms are also vulnerable because of their dependency on financial institutions for external funding. These firms simply do not have access to public capital markets. As a result, shocks to the banking system can have a significant impact on the supply of credit to small businesses 332 . Another concern with regard to loan financing of a number of small firms is their dependency on small banks such as community banks to finance them. This is due in part to the special abilities of the community banks in that market. There are a number of reasons that explain this, among which a good knowledge of the local markets, and the advantage that such banks have over larger, more centralised, credit institutions in developing long term relationship lending with borrowers. Such an approach in banking is often important in the case of SME loans, as it is frequently the case that SMEs have little or no collateral or credit history. A bank that has served a customer over a long period will have the advantage however of already knowing the loan applicant and his business, and may therefore be better able to assess the risk in providing a loan to such a borrower. Part of the reason why certain small businesses are dependent on community banks to finance them is also because of the reluctance of large banks to do so. Large banks may choose to avoid such ‘relationship lending’ because these banks are more often headquartered at a substantial distance from potential relationship customers, aggravating the problems associated with transmitting soft, locally-based relationship information to senior bank management. Consistent with this, a recent theoretical model predicts that relationship lending diminishes with “informational distance,” or the costs of generating borrower-specific information, which is likely to be associated with physical distance 333 . 326 Community banks share the following two key characteristics – they are small in size and do most of their business in the community in which they are located. Because those characteristics tend to go together and size is easy to measure, common practice is to define community banks as those below a certain threshold. One of the thresholds most used by banking analysts is $1 billion in total banking assets. Most community banks in the US have assets of less than $1 billion (see www.acbankers.org). 327 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002. 328 “The role of Community Banks in the US Economy”, Federal Reserve Bank of Kansas City, 2003. 329 “The role of Community Banks in the US Economy”, Federal Reserve Bank of Kansas City, 2003. 330 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002. 331 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002. 332 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002. 333 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002. 122
Empirical evidence also exists which supports the view that large banks are less likely to make relationship loans. A number of studies have revealed the following insights: 1. large banks tend to devote lower proportions of their assets to lending to small businesses 334 ; 2. small business loans that are made by large banks tend to be to larger, older, more financially secure businesses; 3. large banks tend to base their small business loan approval decisions more on financial ratios and less on the existence of a prior relationship than small banks; 4. small business loans made by large banks have lower interest rates and lower collateral requirements than the small business loans made by small banks, consistent with transactions-based loans to relatively safe small businesses by the large banks 335 . The relationship between bank size and the extent to which banks engage in small business lending may therefore have implications for the availability of credit to small firms. Substantial consolidation in the banking industry over the past twenty years has dramatically reduced the number of banks, increasing the importance of large banks and the concentration of industry assets. Given that large banks tend to be proportionately less committed than smaller banks to small business lending, these changes to the structure of the industry have raised concerns about possible reductions in the availability of credit to small businesses in the US. Indeed, when analysing the effect of mergers on the small business lending activities of the banks directly involved in those mergers, a number of studies have found that deals involving at least one large bank tend to reduce small business loans as a share of assets, whereas deals between two small banks tend to increase small business loans as a share of assets 336 . And looking at a breakdown of commercial bank mergers and acquisitions between 1985 and 1999 reveals that while 55% of all such deals involved two community banks, 40% involved a large or mid-sized bank as acquirer and a community bank as a target 337 . As we know from the economic section of this study, industry concentration has increased in the last two decades, with the consequence that today, there are fewer community banks in the US. The number of banks (excluding credit unions) in the US with assets of less than $1 billion has declined from 14,078 banks at the end of 1980 to just 7,631 banks at the end of 2001, and the share of industry assets held by these small banks fell from 33.4% to just 16% 338 . All these findings highlight the fact that the lack of funding to SMEs in the US is indeed an important current issue. Other studies have looked at the “external” effect of mergers on financing to small businesses by looking at what happens to small business lending at banks that compete directly with recently merged institutions. Findings have revealed that a growing amount of credit may be supplied by banks that compete with recently merged banks 339 . Though one might take comfort from such results, it is likely that the overall pool of credit to small businesses in the US has been negatively impacted by mergers and acquisitions, unless of course the “external” effects of these deals somehow lead existing and de novo banks to supply as much or more lending to SMEs than acquired banks did. 6.2.3.1.4 Securitisation of small business loans in the US As noted already above, few small businesses in the US currently have recourse to the capital markets for funding. Though it is recognised that the securitisation of small business loans is a development that could substantially influence the availability of credit, such securitisation has so far been modest, and recent developments suggest that the volume of securitised small business loans is unlikely to increase over the next several years 340 . 334 The average banking organisation with $1 billion or less in total assets held almost 20% of its portfolio as small business loans in June 2001. In contrast, organisations with assets between $1 billion and $10 billion held 13.6% of their assets as small business loans, and the largest organisations—those with assets greater than $10 billion—held less than 8% of their assets as such loans (“Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002). 335 References to the studies leading to these conclusions can be found in "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure", Berger and Udell, Economic Journal, 2002. 336 See for instance “Bank Consolidation and Small Business Lending within Local Communities”, K. Samolyk and C. A. Richardson, Working Paper 2002-02, Federal Deposit Insurance Corporation; “Bank Consolidation and the Provision of Banking Services: The Case of Small Commercial Loans”, R.B. Avery, K. Samolyk, Working Paper 2000-01, Federal Deposit Insurance Corporation, 2000. 337 “The challenges facing community banks: in their own words”, R. DeYoung and D. Duffy, 4Q 2002. 338 “The past, present and probable future for community banks”, R. De Young, W.C. Hunter, G.F. Udell, Journal of Financial Services Research, 2004. 339 “Youth, Adolescence, and Maturity of Banks: Credit Availability to Small Business in an Era of Banking Consolidation,” R. DeYoung, L. G. Goldberg, and L. J. White, Journal of Banking and Finance, February 1999. 340 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002. 123
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September 2006 RESEARCH A COMPARATI
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IE UK FR BE NL LU DK DE SE CZ AT SL
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The following WSBI/ESBG committees
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4 Regulation and supervision compar
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6.5 Issues of competition in retail
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To finish, if we had to pick from a
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In the US, credit institutions have
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Following the same logic, the EU co
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In that context, it is tempting to
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3. INSTITUTIONAL COMPARISON 3.1 Sec
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The market share of the US banking
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FDIC-insured commercial banks are i
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The subsidiary stock institution is
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Regulatory reform over the past thi
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State credit unions were first exem
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There has however been much effort
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3.2.2.2.2.2 Ownership and corporate
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Hermann Schulze-Delitzsch and Fried
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In contrast, building societies in
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The commitment of savings banks is
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4. REGULATION AND SUPERVISION COMPA
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The European Parliament has to be k
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Although younger than CESR, both CE
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Another important common feature be
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