Relationship Lending and Denovo Banks: An Examination of Bank Lending to Small Farm Borrowers

Abstract

In this paper we examine the lending by small banks to small farms. We find that relationships, as measured by the length of tenure of farm operators, are positively related to bank lending. We also find that denovo banks have a positive tendency to lend to small farms, similar to the tendency of denovo banks to lend to small businesses generally. When existing relationships between borrowers and incumbent lenders are stronger, however, denovo banks have greater difficulties in lending to small farms. Finally, we find that, even within the category of small banks, lending to small farms (as a percentage of a bank's assets) tends to decrease as the bank increases in size. We believe that small farms are a category of small enterprises that have been under researched in the lending literature and that further study of these relationships would yield new and interesting results.

Keywords: Banks, loans, lending relationships, denovo banks, agriculture, farms