How Important are Local Community Banks to Small Business Lending? Evidence from Mergers and Acquisitions [Revised]
32 Pages Posted: 6 Jul 2018 Last revised: 29 Apr 2020
Date Written: 2018-06-29
[REVISED AUG 2019]We investigate the shrinking community banking sector and the impact on local small business lending (SBL) in the context of mergers and acquisitions. From all mergers that involved community banks, we examine the varying impact on SBL depending on the local presence of the acquirersâ€™ and the targetsâ€™ operations prior to acquisitions. Our results indicate that, relative to counties where the acquirer had operations before the merger, local SBL declined significantly more in counties where only the target had operations before the merger. This result holds even after controlling for the general local SBL market or local economic trends. These findings are consistent with an argument that SBL funding has been directed (after the mergers) toward the acquirersâ€™ counties. We find even stronger evidence during and after the financial crisis. Overall, we find evidence that local community banks have continued to play an important role in providing funding to local small businesses. The absence of local community banks that became a target of a merger or acquisition by nonlocal acquirers has, on average, led to local SBL credit gaps that were not filled by the rest of the banking sector.
Keywords: community banks, small business lending, bank mergers
JEL Classification: G21, G28, G34
Suggested Citation: Suggested Citation