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

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.
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