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The Ability of Banks to Lend to Informationally Opaque Small Businesses

47 Pages Posted: 16 Feb 2001  

Allen N. Berger

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

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 2001

Abstract

Large and foreign-owned institutions may have difficulty extending relationship loans to informationally opaque small firms. Bank distress does not appear to affect small business lending, although even small firms may react to bank distress by borrowing from multiple banks.

Consolidation of the banking industry is shifting assets into larger institutions that often operate in many nations. Large international financial institutions are geared toward serving large wholesale customers. How does this affect the banking system's ability to lend to informationally opaque small businesses?

Berger, Klapper, and Udell test hypotheses about the effects of bank size, foreign ownership, and distress on lending to informationally opaque small firms, using a rich new data set on Argentinean banks, firms, and loans. They also test hypotheses about borrowing from a single bank versus borrowing from several banks.

Their results suggest that large and foreign-owned institutions may have difficulty extending relationship loans to opaque small firms, especially if small businesses are delinquent in repaying their loans.

Bank distress resulting from lax prudential supervision and regulation appears to have no greater effect on small borrowers than on large borrowers, although even small firms may react to bank distress by borrowing from multiple banks, despite raising borrowing costs and destroying some of the benefits of exclusive lending relationships.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study small and medium size firm financing. The authors may be contacted at aberger@frb.gov, lklapper@worldbank.org, or gudell@indiana.edu.

JEL Classification: G21, G15, G28, G34

Suggested Citation

Berger, Allen N. and Klapper, Leora F. and Udell, Gregory F., The Ability of Banks to Lend to Informationally Opaque Small Businesses (August 2001). World Bank Policy Research Working Paper No. 2656. Available at SSRN: https://ssrn.com/abstract=260575

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

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Gregory F. Udell

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

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

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