Do Small Businesses Still Prefer Community Banks?

34 Pages Posted: 3 Jan 2014

See all articles by Allen N. Berger

Allen N. Berger

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

William Goulding

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Tara Rice

BlackRock, Inc

Date Written: December 31, 2013

Abstract

We formulate and test hypotheses about the role of bank type – small versus large, single-market versus multimarket, and local versus nonlocal banks – in banking relationships. The conventional paradigm suggests that "community banks" – small, single market, local institutions – are better able to form strong relationships with informationally opaque small businesses, while "megabanks" – large, multimarket, nonlocal institutions – tend to serve more transparent firms. Using the 2003 Survey of Small Business Finance (SSBF), we conduct two sets of tests. First, we test for the type of bank serving as the "main" relationship bank for small businesses with different firm and owner characteristics. Second, we test for the strength of these main relationships by examining the probability of multiple relationships and relationship length as functions of main bank type and financial fragility, as well as firm and owner characteristics. The results are often not consistent with the conventional paradigm, perhaps because of changes in lending technologies and deregulation of the banking industry.

Keywords: banks, relationships, small business, government policy

JEL Classification: G21, G28, G34

Suggested Citation

Berger, Allen N. and Goulding, William and Rice, Tara, Do Small Businesses Still Prefer Community Banks? (December 31, 2013). FRB International Finance Discussion Paper No. 1096. Available at SSRN: https://ssrn.com/abstract=2374070 or http://dx.doi.org/10.2139/ssrn.2374070

Allen N. Berger

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

William Goulding

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Tara Rice (Contact Author)

BlackRock, Inc

55 East 52nd Street
New York City, NY 10055
United States

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