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Impact of Bank Consolidation on Small Business Lending

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Published: Mon, 12 Mar 2018

Review of literature

According to the big bank barrier hypothesis large banks provide the credit facilities for larger clients or larger corporate businesses.

Large banks are more likely headquartered in metropolitan cities near to large corporate businesses.

Large banks may not able to get adequate information because the distance between large banks and small businesses are at large. It is frequently determined the credit facilities to them.

Large banks do not have local based environment for relationship lending to small businesses. They are more frequently offered transaction loans for well equipped, larger and financially secure firms. (Hayes and Berney (1999))

Banks relationship lending may be based on local knowledge of small business.

Large banks relatively associates with large clients. They are provided loans with high interest rates and high collateral requirements to large businesses.

Small customers may not able to get loans from large banks with this high collateral requirements and high interest rates. (Berger and Udell 1996)

Small banks are most likely associated with low interest rates and low collateral requirements for transaction loans to small customers.

They also do have local based knowledge about small firms. Informational distance between the small banks and customers are frequently helped to small businesses.

Hauswold and Marquez (2000) suggest that informational distance between the banks and small clients more often reduces relationship lending of the banks to firms.

The consolidation process and bank size frequently have in significant results for small business lending.

Some M&As process between the financial organizations slightly raises and rather than frequently reduces small business lending.

The evidence from the China, shows that total assets of banks is partially insignificant variable for banks to take decision for small and medium business lending. Frequently, the bank’s lending power has been stimulated by the banks’ lending authority, special incentives schemes form government and powerful law enrichments that gives more credit facilities for small and medium scale businesses. Yan Shen et.al (2009)

According to De yang et.al (1996), U.S banking industry has been splinted two primary groups based on asset size of banks through the changes of deregulation, technological and consolation process of banks. They are viz. very large banks and small banks.

Large banks are specialized to create normalized loans with the use of hard information of small business.

Small banks are specialized to give non-normalized loans with the use of soft information and development relationship lending between the small customers.

In the period of 1993-2001 performance of small business lending is based on relationship lending and non-standardized loans of small banks.

Smaller banks performance with small customers are more likely better than larger banks performance in the market of small business lending.

However, large banks are also slightly involved to make roadways for the small business loans. They are very consistent to lend credit facilities to small business due to informational distance. (Berger et.al 2004)

Consolidation process between the small and large banks slightly improves small business loans rather than more frequently reduces lending opportunities to them.

After this process large banks credit facilities declines due to high interest rates and lack of informational collateral requirements. Small banks offer more credit than large banks. After the consolidation process, small banks becomes big with large banks and their credit facilities to small customers has been splinted and shared by non-bank financial institutions of the regions.

Consolidation process between the small and large banks reduces small business credit positively.

The large portion of small businesses credit has been lent by small banks. Small banks are after receives comparative advantage in relationship lending to small customers.

As evidence from the sample of U.S at 1913 from national survey of business finance shows that probability of small firms credit facilities does not reduces in long run. However, in short run may occur disruptions to small firm lending.

It explains that same firms in areas are likely to return credits lately with small banks. There are no more credit constraints available with small banks to such firms.

According to Klien (1971) competition raises between the banks that are more likely to give loans on low interest rates to small customers.

Competition among the banks raises that they have a less ability to lend more credit to small firms with their surplus share of funds. Banks more likely makes decision of credit facilities for small firms on period by period basis. They are less likely extended credit to small firms with their asymmetries information of banks. Rajan et.al (1995)

According to Berger et.al (1998) the credit availability for small businesses are not negatively intervened by banks M&As. However, some M&As process between the large banks and bank holding companies (BHCs) have an inverse effect on small firms lending. Furthermore, small business lending has been more likely raised by M&As process among small banks.

Gobbi et.al (2007) has conducted a study on Italian corporate borrowers, M&As between the banks negatively effect on small businesses lending process. Particularly, lending relationship between the banks and firms has been more likely reduced after the M&As process.

Bill Francis (2008) explains that in short run the overall effect of bank consolidation is inversely related to the small business lending. This negative relationship is initially initiated by large acquirers with consolidation process. Furthermore, consolidation activity between the small and medium size banks have a positive significant effect on small business lending and new business formation. In the long run, consolidation process have a significant positive impact on small business lending that has been initiated by large or well-equipped acquiring banks.

Peek and Rosengren (1997) analyze the relationship among small business and bank lending performances and bank consolidation.

It argues that small business lending depends upon the banks’ capital and assets size. It is mentioned that particular mismanagement and dis-economies of scale may raise the cost expenditure of small business lending when the bank size and complexity rises.

Most of the mergers and acquisitions of banks generate the welfare affects for borrowers and also rescheduled their loan portfolio for small customers. It is positively correlated with the market power and negatively impact on the credit availability for small borrowers based on the relationship lending. Peek (1997) study also gives that the other borrowers get benefit from mergers when their efficiency raises for credit availability to small customers.

The larger sample of private firms has given the negative impact of credit availability to small borrowers when the bank merger rises. It suggests that small, medium banks have served more credit risk to small borrowers because they have the regional knowledge and information relationship between them. Some study also argued that relationship lending for the target bank borrowers slightly raises, but the acquiring bank borrowers frequently declines when the merger announces. (Smith et.al 2002)

The above mentioned review of literature is shown that mergers and acquisitions between the small and large banks have a positive insignificant effect on the small business lending of the different nation in the world. As Concerns from India, Indian banking sector has not been well equipped to foreign banks. Small business lending of the Indian commercial banks are not been satisfactory due to more outreach section of the regions. However, small customer are not able to contact with financial institutions and their credit availability has been captured by non-bank financial institution of the regions like Marvadi, Money Lender and Jeminthar.

  1. (Hayes and Berney (1999))
  2. (Berger and Udell 1996)
  3. Hauswold and Marquez (2000)
  4. Yan Shen et.al (2009)
  5. De yang et.al (1996)
  6. (Berger et.al 2004)
  7. Klien (1971)
  8. Rajan et.al (1995)
  9. Berger et.al (1998)
  10. Gobbi et.al (2007)
  11. Bill Francis (2008)
  12. Peek and Rosengren (1997)
  13. (Kerceski, Onegena and Smith 2002)


  1. Shen, Yan & Shen, Minggao & Xu, Zhong & Bai, Ying, 2009. “Bank Size and Small- and Medium-sized Enterprise (SME) Lending: Evidence from China” World Development Elsevier, vol. 37(4), pages 800-811.
  2. Yildirim, H. Semih & Philippatos, George C., 2007. “Restructuring, consolidation and competition in Latin American banking markets’’ Journal of Banking & Finance Elsevier, vol. 31(3), pages 629-639, March.
  3. Berger, Allen N. & Rosen, Richard J. & Udell, Gregory F., 2004. “Does Market Size Structure Affect Competition? The Case of Small Business Lending” CEI Working Paper Series, 2005-8, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  4. Steven G. and Craig Pauline Hardee (2007), “the impact of bank consolidation on small business credit availability.’’ Journal of Banking & Finance., pages12-63
  5. Joe Peek and Eric S. Rosengren, 1997. “Bank consolidation and small business lending: it’s not just bank size that matters.’’ Working Papers. 97-1, Federal Reserve Bank of Boston.
  6. (Kerceski, Onegena and Smith 2002).
  7. Klein, Michael, 1971. A theory of the banking firm. Journal of Money, Credit and Banking 3 (2), 205–218.
  8. Petersen, Mitchell A., Rajan, Ragjuran G., 1995. The effect of credit market competition on lending relationships. Quarterly Journal of Economies (May), 407–443.
  9. Berger, A.N., Saunders, A., Scalise, J.M., Udell, G.F., 1998. The effects of bank mergers and acquisitions on small business lending, Journal of Financial Economics, 50(2): 187-229.
  10. Peek, Joe, Rosengren, Eric S., 1998. Bank consolidation and small business lending: It’s not just bank size that matters. Journal of Banking and Finance 22, 799–819.
  11. Strahan, Philip E., Weston, James P., 1998. Small business lending and the changing structure of the banking industry. Journal of Banking and Finance 22, 821–845.
  12. Bill Francis, Iftekhar Hasan, Haizhi (2008) “Wang Bank consolidation and new business formation’’. Journal of Banking & Finance 32, 1598–1612
  13. Allen N. Berger, Leora F. Klapper, Gregory F. Udell (2001) “The Ability of Banks to Lend to Informationally Opaque Small Businesses’’ The World Bank Development Research Group Finance. policy research working paper 2656
  14. Hauswald, R., Marquez, R., 2000. Relationship banking, loan specialization and competition, Indiana University working paper.
  15. Haynes, G.W., Ou, C., Bemey, R., 1999. Small business borrowing from large and small banks, in Business Access to Capital and Credit, edited by J.L. Blanton, A. Williams, and S.L.W. Rhine, A Federal Reserve System Research Conference, 287-327.
  16. DeYoung, R., Nolle, D.E., 1996. Foreign-owned banks in the U.S.: Earning market share or buying it? Journal of Money, Credit, and Banking 28(4): 622-63 6.
  17. Berger, A.N., Udell, G.F., 1996. Universal banking and the future of small business lending, edited by A. Saunders and I. Walter, Financial system design: The case for universal banking, Burr Ridge, IL, Irwin Publishing, 559-627.
  18. Bonaccorsi Di Patti, Emilia, Gobbi, Giorgio, 2007. Winners or losers? The effects of banking consolidation on corporate borrowers. The Journal of Finance LXII (2), 669–695.

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