Small-business lending and profit efficiency in commercial banking

We use nonparametric linear programming methods to calculate the directional distance function and the profit function for a random sample of banks from 1994 to 1999. The estimates imply that the gain in small-business lending from reducing technical inefficiency is minor compared to the gain possible from eliminating allocative inefficiency. Actual small-business lending early in the sample period is less than optimal, but the misallocation is confined to small banks. As a percentage of assets, small-business lending is larger for the most efficient banks.