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By Premier Insights

In Industry Updates

Posted October 18, 2018

Community Banks and Small Business Lending

Community Banks and Small Business Lending

Community Banks are important economic cornerstones in many communities throughout the nation.  According to call report data, commercial banks with less than $10 billion in assets hold 17 percent of total banking assets in the United States but roughly 53 percent of small loans to businesses. From 2008 to 2017, the number of banks this size in the country decreased by one-third and total assets dropped by 14 percent. At the same time, larger bank assets increased by 13 percent over the same period.

FDIC Small Business Lending Survey (2018)

This prompted the FDIC to investigate how small banks and large banks differ in their lending practices to small businesses. The critical question – How will consolidation trends in the banking industry affect access to credit for small businesses? The FDIC surveyed 1,200 banks and published the results in a report titled, “FDIC Small Business Lending Survey (2018).”

The results suggest that the importance of small banks to small businesses’ access to credit is more significant than originally believed. The current understanding of small business lending is hindered by the difficulty of determining if loans are small-business loans or not. The best available measure of small business lending is a proxy based on loan size.

The FDIC’s direct survey of banks regarding their small business lending highlighted the inaccuracy of this proxy. The survey indicates that this proxy systematically understates small business commercial and industrial (C&I) lending, especially for small banks. In 2015, overall small business C&I lending was understated by at least 12 percent, and small business C&I lending for small banks was understated by 29 percent.

Therefore, this effort by the FDIC to understand the similarities and differences between small and large banks in their lending habits to small businesses is crucial.

Similarities Between Small and Large Banks

  • Importance of relationships
    • Majority of small and large banks are willing to grant underwriting exceptions to borrowers with an existing relationship
    • Small and large banks most frequently cite personal attention and relationships as their top competitive advantage
    • Small and large banks use high-touch, staff-intensive practices to maintain and generate small business lending relationships
  • Products and Underwriting Criteria
    • Small and large banks offer a similar set of products
    • Small and large banks use similar underwriting criteria
    • Small and large banks accept similar types of collateral
  • Local Lending and Competition
    • Small and large banks consider local competitors, including relatively smaller banks, as their top competitors
    • Small and large banks primarily lend locally to small businesses
    • Few small or large banks accept small business loan applications online

Differences Between Small and Large Banks

  • Small bank characteristics
    • Small banks are more likely to be perceived by competitors as having advantages in customer service and speed
    • Small banks are more flexible in qualifying small business customers and startups for loans, including evaluating owner education and experience in the industry
    • Small banks are less likely than large banks to use minimum loan amounts
    • Small banks are more likely than large banks to accept real estate collateral
  • Large bank characteristics
    • Large banks use only a small number of terms to describe small business customers (e.g. revenue/sales) and look for guarantees (e.g. SBA guarantees) from startups
    • Large banks are more likely to be perceived by competitors as having advantages in conveniences, particularly by having more branches, and in pricing.
    • Large banks are more likely to accept applications during staff visits and over telephone calls

Both large and small banks perceive themselves as relationship-based lenders. However, a closer look at the differences indicates that small banks are more likely than large banks to extend credit to less established firms based on these relationships.

As one might expect a priori, large banks standardize their decision-making due to the volume of small business lending decisions made by the bank. Alternatively, small banks, which often have more extensive knowledge of their local markets, are more likely to lend based on owner characteristics and accept real estate as collateral.

While the similarities between small and large banks in their perceptions of their own advantages, competition, and in the products offered may suggest a high degree of commonality, the differences in flexibility provide some understanding as to why small banks hold the majority of small business loans.


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Premier Insights is an analytical and consulting firm specializing in econometric and statistical analysis for the banking industry, Fair Lending and CRA consulting, and other research and analytical services.

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