Small Business Credit Availability and Relationship Lending: The Importance of Bank Organizational Structure

Posted: 24 Nov 2009  

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Date Written: 2002

Abstract

Changes in the economic environment where banks and small businesses operate have raised questions about the availability of credit to small businesses. Small businesses have fewer alternatives to external finance than do large companies. A brief overview of small firm financing is offered, emphasizing the important role of financial institutions in providing external finance to small businesses. Lending is categorized into four separate technologies: financial-statement lending, asset-based lending, credit scoring, and relationship lending; lending is compared with the other technologies in terms of how they are implemented and whom they are targeted to. Next, organizational issues associated with structuring the lending function are examined, and a simple model of bank-lending is proposed. The model is used to examine the impact of shocks to the economic environment in which banks and small businesses function on the availability of credit to small business, including technical innovationssuch as credit scoring, regulatory regime shifts such as toughened bank supervision, shifts in competitive conditions such as banking industry consolidation, and changes in the macroeconomic environment such as monetary policy shocks. The proposed model identifies three key features of relationship lending: (1) it depends on 'soft' information about the firm, its owner, and the local community; (2) the loan officer has the most important relationships with the firm, owner and community; and (3) an agency problem appears between the loan officer and bank management because of the soft nature of relationship information. The joint solution to these problems helps assess the capacity of the bank to deliver relationship lending. (CBS)

Keywords: Relationship lending, Theoretical, Lending policies, Organizational structures, Banking industry, Banking industry, Credit, Business conditions, Financing, Loans

Suggested Citation

Berger, Allen N. and Udell, Gregory F., Small Business Credit Availability and Relationship Lending: The Importance of Bank Organizational Structure (2002). The Economic Journal, Vol. 112, Issue Feb, p. F32-F53 2002. Available at SSRN: https://ssrn.com/abstract=1510030

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Paper statistics

Abstract Views
1,079