Small business lending and the changing structure of the banking industry

This study investigates the relationship between bank lending to small businesses, banking company size and complexity, and bank consolidation. We consider two potential influences on small business lending associated with changes in the size distribution of the banking sector. On the one hand, organizational diseconomies may increase the costs of small business lending as the size and complexity of the banking company increases. On the other, size-related diversification may enhance lending to small businesses. We find first that small business loans per dollar of asset rises, then falls, with banking company size, while the level of small business lending rises monotonically with size. Second, consolidation among small banking companies serves to increase bank lending to small businesses, while other types of mergers or acquisitions have little effect. We interpret these findings as consistent with the diversification hypothesis. (C) 1998 Elsevier Science B.V. All rights reserved.