Bank Consolidation and the Provision of Banking Services: The Case of Small Commercial Loans

Abstract

This paper examines how bank small business lending in local markets was related to bank merger activity during the mid-1990s. The authors use deposit data reported at the branch level to impute the distribution of bank small business loans across urban and rural markets; they then study the link between various types of merger activity and the growth of small business lending in the local market. Multivariate tests indicate that bank consolidation is more broadly linked to lower estimated loan growth in rural markets than in urban ones. However, there is also evidence of lower small business loan growth in concentrated urban markets that are experiencing within-market merger activity. And, consistent with bank-level research, bank consolidation mainly involving mergers between smaller banks tends to be associated with greater small business credit availability in local banking markets. Finally, the authors validate their empirical strategy by comparing their geographic loan estimates to geographic loan originations reported since 1996 by larger institutions under the auspices of the Community Reinvestment Act.

JEL Classification: G210, L100, L400, G280