Cookie-Cutter Versus Character: The Micro Structure of Small Business Lending by Large and Small Banks
46 Pages Posted: 23 Feb 2002
Date Written: February 14, 2002
The informational opacity of small businesses makes them an interesting area for the study of banks' lending practices and procedures. We use a survey of small businesses conducted by the Federal Reserve to analyze the micro-level differences between large banks and small banks in the loan approval process. We provide evidence that large banks ($1 billion or more in assets) tend to employ standard criteria obtained from financial statements in the loan decision process, but that small banks (less than $1 billion in assets) deviate from these criteria by relying to a larger extent on the character of the borrower. Some of the results are inconsistent, however. These "cookie-cutter" and "character" approaches are compatible with the incentives and environments facing large and small banks.
Keywords: Small business lending, Banks, Relationship banking, and Size of bank
JEL Classification: G21
Suggested Citation: Suggested Citation