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 14 of 21)
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is a consequence of this subset of banks having lower than
average capital ratios and higher than average nonperforming loan
ratios .

In summary, de novo banks are unlikely to fill any major
void in small business lending. De novo entry has occurred
during boom periods, when alternative sources of funds are most
likely to be available. While de novo entrants have focused on
small business loans, their small size and the observation that



142



most de novo entrants remain small institutiong after as long as
a decade indicate that such entries can fill niches, but not
voids .

IV. Conclusion

Bank consolidation that leads to larger lenders could make
small business borrowers less dependent on the vagaries of local
banking markets, if the merged institutions maintain the acquired
small business lending line of business. During the recent
period of reduced credit availability, bank- dependent borrowers
in New England had few borrowing alternatives because both large
and small banks had portfolios dependent on New England economic
conditions. Greater diversification across geographic regions
and across product lines would have ameliorated the problems
faced by small businesses as a result of the shocks to bank
capital and the consequent reduction in loan supply to bank-
dependent borrowers.

Nonetheless, the move towards large consolidated
institutions carries some risks for bank -dependent borrowers.
Much of the recent growth in small business loans has been at
small banks. Banks engaged in acquisitions in New England have
not fostered the small business loan segment of the market, with
both the share and the amount of small business loans declining
after most acquisitions. While this may be an artifact of
examining data in New England over a short period of time, it
raises questions about the availability of credit to small



143



business in areaa that become dominated by large lenders.

The potential benefits of bank consolidation are clear: in
particular, we have evidence that a lack of sufficient bank
diversification has been a problem for credit availability when
banks have been subjected to local shocks that reduced capital.
The potential costs are less certain, but nonetheless they
deserve the attention of policymakers. We have not yet attained
a level of bank consolidation that would produce a shortage of
viable lenders to small business. However, the New England
evidence does suggest that as restrictions on both product and
geographical diversification are eliminated, potential problems
for small business credit availability will be an important
issue. It is possible that other sources of credit to small
businesses will become available if bank consolidation leads co a
reduction in small business credit availability. However, it is
likely chat, at the very least, there will be transitional
problems.



144



References

Berger, Allen N. and Gregory F. Udell. 1994. "Lines of Credit
and Relationship Lending in Small Firm Finance."
Manuscript, revised July.

Berger, Allen N. and Gregory F. Udell. 1995. "The Size and

Complexity of Banking Organizations and the Future of Small
Business Lending." Presented at Conference on Universal
Banking, Salomon Center, Leonard N. Stern School of
Business, New York University, February 23-24.

Boyd, John H. and Stanley L. Graham. 1991. "Investigating the
Banking Consolidation Trend." Federal Reserve Bank of
Minneapolis Quarterly Review , Spring, 3-15.

Cornett, Marcia Millon and Hassan Tehranian. 1992. "Changes in
Corporate Performance Associated with Bank Acquisitions."
Journal of Financial Economics . 31, pp. 211-34.

Elliehausen, Gregory E. and John D. Wolken. 1990. "Banking
Markets and the Use of Financial Services by Small and
Medium-Sized Businesses." Staff Studies No. 160, Board of
Governors of the Federal Reserve System, September.

Peek, Joe and Eric S. Rosengren. 1995a. "Bank Regulation and the
Credit Crunch." Journal of Banking and Finance , vol. 19 (l),
forthcoming.

Peek, Joe and Eric Rosengren. 1995b. "Banks and the Availability
of Small Business Loans." Federal Reserve Bank of Boston
Working Paper No. 95-1, January.

Petersen, Mitchell A. and Raghuram G. Rajan. 1994. "The



145



Benefits of Lending Relationships: Evidence from Small
Business Data." Journal of Finance . 49(1), pp. 247-67.

Scanlon, Martha. 1981. "Relationship Between Commercial Bank
Size and Size of Borrower." Studies of Small Business
Finance, Interagency Task Force on Small Business Finance.

Whalen, Gary. 1994. "Wealth Effects of Intraholding Company

Mergers.- Evidence from Shareholder Returns." Comptroller
of the Currency Economic & Policy Analysis Working Paper 94 ■
4, May.



146



Footnotes



1. The "original amount" of a loan is the size of the loan at
origination, rather than its current size, unless the latter is
larger. For a line of credit or loan commitment, it is the size
of the line of credit or loan commitment when most recently
approved, extended, or renewed. For loan participations and
syndications, it is the entire amount of the credit originated by
the lead lender.

2. The ratio used is equity capital divided by unweighted assets,
which most closely resembles the leverage ratio. Because some
items used in capital ratio calculations were not detailed in the
past, it is impossible to replicate exactly the current
definition of the leverage ratio.

3. We do not include transactions that involve institutions that
are not insured by the FDIC, since the call reports include data
only for FDIC- insured institutions.

4. The lower average percentage for the total of all New England
small banks is due to the prevalence of savings banks,
traditionally residential mortgage lenders. However, in recent
years they have been expanding their business lending,
particularly to small businesses.

5. Among the existing de novo banks are a few savings banks.
This has the effect of understating the small commercial loan
numbers when compared to the sample of all small commercial
banks .



147



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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 14 of 21)