Banking Consolidation and the Availability of Credit to Small Businesses

Abstract

In this study, we use firm-level data from the 1993 National Survey of Small Business Finances to test the hypothesis that banking consolidation has reduced the availability of credit to small businesses. We find that banks in markets where mergers have occurred are more likely than other banks to deny credit to small business loan applicants. However, this relationship disappears after we control for characteristics of the small business firm and its principal owner, the economic environment of the market where the firm is located, and the financial condition of the prospective lender. Moreover, we find that one set of banks, those in the process of acquiring other banks, are less likely to deny credit to small businesses. These results suggest that consolidation in the banking industry may have enhanced rather than restricted the availability of credit to small businesses. However, the data reflect credit availability during 1991-94, and may not be representative of subsequent credit conditions. Nor does the analysis rule out possible changes in the terms of credit available to small businesses.

Keywords: acquisition, bank, credit, merger, relationship, small business, takeover

JEL Classification: G21, G34, E51