United States. Congress. House. Committee on Small.

The effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 online

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Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 12 of 21)
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This year, a Bank of Boston Corp promotion, citing the
data, boasted that it had made more small-business loans in
Massachusetts than any of its peers "Small business is big
business at Bank of Boston," it said.

But counting all small-business loans, including those
outside Massachusetts, Bank of Boston trailed behind

some major Xew England rivals Small-business loans in
June 1994 accounted for 13°/o of its domestic business
lending Al Fleet Financial Group Inc. in Providence. R.I.,
and Shawmut National Corp in Hartford, Conn , such
loans made up 32% and 26° o of domestic business lending,

David Aloise, Bank of Boston's director of small
business banking, defends the promotion. He says small
business owners "want to see a willingness to make loans,"
and Bank of Boston is willing and able.

Bank holding companies with assets of more than
S20 billion in the domestic offices of their commercial
bank affiliates. As of June 30, 1994.

Domestic Small
Domestic Small Business
Business Business Loans
Loans Loans As % of
(S billions) (S billions) Total Bank

Holding CompanyLocale
First of America Bank Corp .'Kalamazoo, Mich.
S4.0S S2 34 57 3%

Norwest Corp 'Minneapolis

S27 4 23 51 1

KeyCorp. Cleveland

13 60 5 SO 42 6

Banc One Corp. Columbus, Ohio

15.77 615 390

Boatmen's Bancshares/St. Louis

6 21 2 25 36 2

Fleet Financial Group/Providence, R I
1198 3.81 31 S

First Union Corp 'Charlotte, X C

16 26 5 09 31.3
First Bank System/Minneapolis

7.11 222 31.2

SunTrust Banks. .Atlanta

10 99 3.33 30.3

National City Corp /Cleveland

9 22 2 71 29 3

NBD Bancorp; Detroit
11 65


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U S. Bancorp/Portland, Ore

7 29 1 95 26 S

Shjwmut National Corp "Hartford, Ccnn.
6 96 IS: 26 2

CoreStates Financial Corp /Philadelphia
S.95 2.30 25 7

Comenca Inc. 'Detroit

11.41 2.S7 25 2

First Fidelity Bancorp*/Newark, N J
S43 2.10 24 9

First Interstate Bancorp/Los Angeles
9.23 2 26 24 5

Wachovia Corp. /Winston-Salem, N.C
9.79 2.21 22 5

Wells Fargo 3c Co. San Francisco

12.41 2.79 22.5

1962 2 14 109

Chase Manhattan Corp /New York

9 43 93 9.S

.' lei Ion Bank Corp Pittsburgh

9 72 0.S5 SS

Bamett Banks Jacksonville. Fla.

632 0.50 74

Bankers Trust/New York

2 S3 05 1.8

J F Morgan/New York

3 44 i) 04 1 1

Note Small-business loans consist of commercial
and industrial loans of SI million or less made to firms with
U S addresses as well as mortgage loans of SI million or
less backed by nonfarm, nonresidential properties Total
business loans remove the SI million limitation

*25 4° o owned by Banco Santander SA of Spain as
of June 1994.

National Westminster Bank-London
9.07 2.00 22

Bank of New York Co./New York

656 1.33 210


Percent of all small-business loans bv size of bank

DOMESTIC .ASSETS (in billions)

NationsBank Corp. /Charlotte. N.C.

40 60 8.30 20 4

BankArnerica Corp/San Francisco

23 15 4.60 199

PNC Bank Corp .Pittsburgh

13 13 2.51 19 1

Bank of Tokyo/Tokyo

11 01 1.55 14 1

Under 51

47 7° -o

S1-S4 9






S20-S29 9

6 3%


4 7%

Source. The data for the accompanying articles and
tables were compiled by Edward P. Foldessy from
computer tapes obtained from the federal banking

Bank of Boston Corp. .Boston

12.96 1 70 13 1

First Chicago Corp /Chicago

9 02 1.06 US

Citicorp/New York

1623 1 S3 113

Chemical Banking Corp /New York

How Analysis of P.eports By Banks Was Conducted
To examine small-business lending patterns, The
Wall Street Journal analyzed the financial reports filed by
almost 1 2.000 banks with federal banking regulators for the
1 994 second quarter

Banks are required to disclose in their June call
reports the amount arid number of commercial and
industrial loans of SI million or less, as well as mortgage
loan-; of that amount backed by nonfarm. nonresidential
properties The Journal study calculated the total amounts

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Smaller banks
squaring off
against giants

Oppose rule letting big rivals
take larger market share

By Alex Pham


Faced with the prospect of three banks
controlling close to 50j>ercent of all depos-
its in Massachusetts, some little banks have
decided to fight back.

A group of the state's smallest banks
have banded together to oppose a provision
in a state bill that would raise the maximum
allowable percentage of deposits controlled
by one bank from 25 percent to 30 percent.

The issue, introduced in a larger inter-
state banking bill sponsored by Rep. Salva-
tore DiMasi (D-Boston) and Rep. Philip
Travis (D-Rehoboth), has pitted small, com-
munity banks against the larger institutions
at a time when the_big b anks sfon to be

getting bigger by the month as the industry
continues to merge. The bill has passed the
Senate and awaits review by the House
Ways and Means Committee.

In Massachusetts, the rash of mergers
will soon leave three banks in control of
nearly 50 percent of the state's deposits.
Bank of Boston, which is merging with Bay-
Bank Inc., will wind u p wit h 26 percent of

all deposits in the state. Fleet Finan-
cial Group controlled more than 14
percent of deposits after its merger
with Shawmut National Corp. in No- .
vember, according to Advest Inc. in

Afraid of being wiped out, small ;
banks represented by the Communi-
ty Bank League of Massachusetts
say that allowing a single bank to
snare 30 percent of the state's de-
posits will choke competition, reduce
community access to small business
loans and touch off another round of
mergers and layoffs.

Bankers represented by the
Massachusetts Bankers Association,
including Fleet and Bank of Boston,
say the provision simply puts the
commonwealth in line with 28 other
states, including New York, Con-
necticut and Maine. The 30 percent
cap is also recommended by federal
interstate banking guidelines issued
in 1994, legislators said.

"The issue is whether Massachu-
setts wants to remain a host state for
the headquarters of major banks,"
said Richard Diiscoll, president of
the Massachusetts Bankers. "I'm
talking about-keeping the Bank of
Bostons and the Fleets here in the
state. We want banks here with the
capacity to make the larger loans.
We don't want businesses to have to
rely on New York City or Chicago.
Do it here."

Community bankers see it differ-

"If two banks can control 60
percent of the deposits in our state,
that sets up the groundwork for
predatory pricing," said Paul C.
Green, president of the Massachu-
setts Cooperative Bank in Dorches-
ter, a $35-million institution.

Donald S. Glass, president of the
Community Bank League, said:
"Our institutions make loans to peo- 1
pie that don't fit into the mold - that |
bigger banks can't accommodate. If |
we're not there, who's going to make
these loans?" |

Driscoll dismissed the notion that .
two or three banks can set prices i
and choke off small rivals.

"There's plenty of competition,"
Driscoll said. 'There are more than
260 banks in Massachusetts. So-
called nonbanks also draw deposits.
Fidelity takes deposits. Credit
unions take deposits. There ain't no j
choking going on here."

Driscoll points out that cooperat- i
ive banks in the state, which tend to ,
be smaller banks, actually increased
their market share from 22 to 25
percent in the last five years. In ad-
dition, there are already stringent
state and federal laws in place to ;
prevent market domination.

Indeed, bank specialists say that
community banks will always be
around as long as there are consum-
er who value personalized service.
"There will always be room for

the small, well-run community
bank," said James Moynihan, senior
vice president of Advest Inc. "This is
a wonderful opportunity for small
banks to capture the small business-
man who'd rather walk into his
banker's office and get a loan with a
handshake. Size can give you access
to better technology, but it doesn't
necessarily give you better service."

Lennart B. Piahn Jr., president
of the 106-year-old Roxbury High-
land Bank says his institution has
survived the onslaught of mega-
banks by getting to know customers
by their first names. . ;

"It all comes down to service,"
Plahn said. "You're not a number
here, and you're not guided into
these ropes like cattle. You can come
here and sit down with the president
of the bank, if you want to." ;

Still, Plahn and others fear the
30-percent rule would leave fewer
deposits available to smaller banks.

"The issue is: When is enough
enough?" said Glass. "Megabanks
deal in commodities, not communi-
ties." >


Smaller banks squaring off
against giants

Oppose rule letting big rivals
take larger market snare

Bank deposits

Massachusetts total as of Sept. 30, 96. By bank



Fleet _ .,

Bank of Boston
$15.8 billion


*Bank of Boston and BayBank have since increased
their combined market share to 26 percent.
SOURCE: Advest, inc.



mall Business

Credit Availability:
Bow Important Is Size of Lender?

by Joe Peek


Eric S. Rosengren

April 1995
Working Paper No. 95-5

Rrpnnted • August 1995

Federal Reserve Bank of Boston


Small Business Credit Availability: How Important Is Size of

With the recent adoption of interstate branching and new
legislative initiatives to relax Glass-Steagall restrictions, the
movement towards nationwide banking should accelerate the ongoing
consolidation in the banking industry. The regional shocks that
have caused financial distress in the banking industry since the
early 1980s have highlighted the costs associated with bank
specialization by region and product. In those regions that have
faced adverse shocks, significant attention has been given to
credit availability issues, particularly to small firms that tend
to be bank -dependent borrowers. While banks and consumers may
benefit from eliminating restrictions on product lines offered by
banks, the primary benefit to the macroeconomy will be the
amelioration of the local effects on credit availability of
regional or sector- specif ic shocks to bank capital, as bank
consolidation leads to increased geographic and product
diversification by banks.

However, the increased concentration of banking assets could
also introduce potential problems for the longer term. An area
of particular concern is the effect on the availability of loans
to small businesses. Small business borrowers traditionally have
relied on banks to satisfy their credit needs. While large
borrowers increasingly gain direct access to national credit
markets by issuing commercial paper and bonds, small business
borrowers continue to be bank dependent. Thus, these borrowers
are particularly sensitive to changes in bank regulation or in


the structure of the banking industry.

Moreover, small businesses traditionally have relied on
small banks to provide a significant amount of their financing.
Banks are required to limit their exposure to any one borrower to
no more than 15 percent of their equity, and many choose a much
smaller threshold. This limit on borrower concentration has the
effect of restricting business lending by small banks primarily
to small business loans. As the banking sector consolidates
through purchases of many of the smaller banks, the impact of the
limitations on borrower concentration, which have guaranteed that
a subset of banks would specialize in small business loans, will
be mitigated. As larger banks that are not constrained by
borrower concentration lending limits purchase email and medium-
Sized banks with large portfolio shares of small business loans,
the availability of small business loans may become an important
public policy issue.

The extent to which large acquiring banks retain these
portfolios of small loans will be affected by the motivation for
the acquisition. Are the acquiring banks most interested in low-
cost core deposits, an increased market share, a more balanced
geographic coverage of the franchise, or expertise in particular
lines of business, including the accumulated stock of private
information about small loan customers at these small banks?
That is, are acquirers after the asset side or the liability side
of the acquired bank's balance sheet, and if the former, the
wholesale or retail lines?


Since small business lenders have accumulated a stock of
private information about their small business customers, small
business lending could be a profitable line of business for an
acquiring bank, even if it is not currently an area of emphasis.
If this is so, we may have little to fear regarding reduced
credit availability to small businesses. However, if the
information is not easily transferred, or if small business loans
are uneconomical given the overhead costs of many larger
institutions, over time the acquirer may jettison this acquired
line of business. It remains an open question how readily other
existing banks or de novo banks would fill the consequent void.

The 50 largest lenders to small businesses currently account
for approximately 20 percent of the small business loan market
nationwide. While the list includes a number of the largest
banks in the country, it is dominated by the superregionals .
Since these banks have been involved in a large number of recent
acquisitions of small banks, it is not yet clear whether their
apparent emphasis on small business lending is simply an artifact
of the recent acquisitions that have not yet been digested or,
instead, reflects a commitment to a longer-term business strategy
that includes this as a major line of business. Because the
largest bank holding companies are likely to expand their already
large share of this business as a result of additional
acquisitions of small and medium-sized banking organizations, it
will be important to monitor how consolidation affects small
business lending.


This paper examines the significance of consolidation in the
banking industry for the availability of small business credit.
Using a cross -section data set of New England banks that includes
the structure changes that have occurred in that market and a
newly available survey of bank lending to small business, wg
examine how the small business lending market has been altered by
bank acquisitions. The first section will examine who lends to
small businesses nacionwide. While small banks do lend primarily
to small businesses, large banks account for a surprisingly large
share of small business lending. The second section discusses
the benefits of having large, nationwide lenders. In particular,
we emphasize how increased geographic diversification by banks
can reduce the costs to loan customers of the sharply reduced
credit availability associated with adverse regional or local
shocks to bank capital. The third section examines the potential
problems associated with small banks being acquired by larger
entities that may have little interest in continuing historical
lending relationships. Frequently, small business loans decrease
both after the announcement of an acquisition and after the
acquisition is consummated. The final section provides some
concluding remarks on how bank consolidation may affect small
business lending.

I. Overview of the Small Business Lending Market

Despite the importance of the small business lending market
to banks and borrowers alike, few data about these loans were


available in the pasc. Recently, however, the Congress has been
concerned about the effect of credit contractions on small
business. As a result, federal bank regulators now are required
to collect information annually on small business loans,
beginning with the second-quarter 1993 bank call reports. Banks
are asked for data on two types of business loans- -nonf arm,
nonresidential loans and commercial and industrial loans - in
three size categories: loans less than $100,000, less than
$250,000, and less than $1 million. While this information is
quite informative about the pattern of small business lending, it
must be interpreted with caution. First, the size of the loan,
rather than the size of the business borrower, is used to define
"small business lending." Second, because it is a new survey, it
is likely that numerous reporting errors may have been made by
banks, in some instances the result of a misinterpretation of the

Size of business rather than size of loan is obviously a
preferred measure. Presumably this question was asked in terms
of size of loan for call report purposes to minimize the cost to
banks of complying with the question, since loan size would be
readily available, but size of business would require examining
each loan file. Scanlon (1981) found that loan size did serve as
a good proxy for borrower size for very large loans and for very
small loans, but less so for the middle range. One might be
concerned that when large firms make a partial takedown of a loan
commitment or draw on a large credit line, it would be counted as


a small loan. However, this survey asks questions in terms of
"original amounts" of loans, carefully defined to ascertain the
size of the total credit granted to the firm rather than a
particular bank's share of a participated or syndicated credit,
or the 9ize of a particular draw against a line of credit or
commitment. 1

Because this is a new survey, bank answers may have suffered
from being on the early portion of a learning curve. In fact,
Berger and Udell (1995) find inconsistencies between the small
business survey data on the call report and the Survey of Terms
of Bank Lending data. In particular, they find that banks
answering the question as to whether all or substantially all of
their nonfarm, nonresidential real estate loans and commercial
and industrial loans had original amounts of $100,000 or leas may
have answered in terms of number of loans rather than volume of
loans, as intended. However, this explanation accounts for only
a portion of the general underreporting of original amounts found
by Berger and Udell (1995) . Furthermore, the underreporting is
much more important for the smaller loan sizes. For our study,
we have minimized the problems by using the $1 million or less
loan category as our definition of small business loans; we have
also carefully scrutinized the small loan data for New England,
identifying what appeared to be egregious errors and following up
with a phone call to the bank for an explanation or correction.


The Importance of Small Business Lending to Banks, by Size of

The upper panel of Table 1 shows small business loans as a
share of total business loans outstanding at all FDIC- insured
banks in the United States, ordered by bank asset size as of June
30, 1994. Not surprisingly, loans to small businesses account
for most business lending by small banks. Banks are required to
limit their exposure to any one borrower to no more than IS
percent of their equity, and frequently they impose even lower
internal limits. This limit on borrower concentration has the
effect of restricting small banks primarily to small loans.

Perhaps more surprising is the proportion of small business
loans held by the larger banks. For banks with assets of between
$1 billion and $5 billion, small business loans (loans under SI
million) make up 43 percent of their nonfarm, nonresidential
loans and 37 percent of their commercial and industrial (C&I)
loans. Only at the largest banks, those with assets of over $5
billion, does the share of these small business loans drop below
one- third, accounting for only 32 percent of nonfarm,
nonresidential loans and 17 percent of C&I loans. However, this
difference in the shares of small business loans held by large
compared to small and mid-sized banks may change in the next few
years, as the largest banks continue to acquire small and medium-
sized banks .


Market Shares of Buaineas Loana , by Size of Bank

The lower panel of Table 1 showg the 1994:11 distribution of
small business loans among FDIC- insured banks, grouped by Che
size of Che bank. Mid-sized banks continue Co hold large shares
of Cotal outstanding bank loans to small businesses. Bank asset
size caCegories from $300 million co $1 billion and $1 billion to
$5 billion each account for approximately 16 percenC of the
market .

While small loans do not constitute a particularly large
part of the portfolios of the largest banks, a large bank's share
of CoCal loans to small businesses can be relatively large
because of Che size of the overall inscicucion. Banks wich
assecs over $5 billion hold 29 percenc of all small business
loans held by banks. This is a signif icanCly smaller markec
share than cheir holdings of Cocal business loans, buc still a
major market share, given that loans to small business make up
only 22 percent of total business loans held by the largest
banks .

The Largest Small Business Lenders

Table 2 lists Che top 25 small business lenders in Che
country, which include four of the ten largest banks in Che
counCry based on Cocal assets. These four banks account for 7.1
percent of all business loans, but only 2.5 percent of all small
business loans.

This group of 25 banks is somewhat heterogeneous. While a


bank must be large Co qualify for this list (all are included in
the top 86 banks in the country baaed on assets) , size alone is
not sufficient. Among the large money center banks located in
New York and Chicago, only Citibank, the largest bank in the
country, is included. Nor is a focus on small business lending
sufficient, for the small business share of business loans of
banks on this list ranges from 54.4 percent down to as little as
7.5 percent. Still, half the banks on the list are also in the
top 25 banks by asset size, and half have small business loan
shares in excess of 25 percent.

Many of the largest small business lenders are
superregionals . Five Nationsbank subsidiaries and two Key Bank
subsidiaries are included in the top 25. Many of the large
superregionals have grown rapidly over the past 10 years, as they
acquired smaller banks following regional compacts that relaxed
restrictions on interstate banking. While the acquisition of
small banks that focus on small business loans may have accounted
for their status as major small business lenders, it remains to
be seen whether this concentration in small business loans will
be retained as these banks continue to grow.

While some holding companies appear to have a corporate
strategy that focuses on small business lending, many of the
other major lenders to small business are less clearly targeting
small business lending. For example, the Key Banks have focused
on small business lending, with the two subsidiaries in the top
25 small business lenders each having more than 40 percent of its


buainesa loans of a size below $1 million. In contrast, among
the Nationsbank subsidiaries, the percentage of small business
loans to total business loans ranges from 10.8 percent in Texas
to 44.5 percent in South Carolina.

II. Potential Benefits of Large Lenders: Diversification across
Regions and Products

To examine the potential benefits and costs of universal
banking, we focus on the recent experience of banks in New
England for a number of reasons. First, the region has recently
experienced significant problems with credit availability to
small businesses. Thus, the lack of large, well-diversified
national lenders insulated from regional economic downturns is
moat starkly apparent in this region. Second, we have a
comprehensive bank structure file for this region, enabling us to
identify mergers, failures, and asset transfers at these banks.
Third, New England has experienced significant consolidation and
de novo entry, making it an ideal region in which to examine the
effects of consolidation and new entry on small business lending.

The upper panel of Table 3 shows small business loans as a
share of total business loans outstanding at all PDIC- insured
banks in New England, ordered by bank asset size as of June 30,

1 2 3 4 5 6 7 8 9 10 12 14 15 16 17 18 19 20 21

Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 12 of 21)