Changes in Non-Local Lending to Small Business

Abstract

In this paper, I use recently collected Community Reinvestment Act loan data to examine how small business lending in local geographic areas (defined as markets) by lenders not physically located in those areas changed between 1996 and 2001. The results show that the importance of "outside lending" increased substantially over this period when measured in terms of the number of loans rather than the dollar volume of loans. The levels and rates of growth in out-of-market lending are more modest if the share of out-of-market lending is expressed in dollar volumes and almost insubstantial if organizations that engage in substantial credit card lending are excluded as out-of-market lenders. Using a fixed-effects model and an extensive panel data set, I find that the share of outside lending into local geographic markets is positively associated with local market concentration and the average wage of tellers in the market, consistent with the hypothesis that outside loans are to some degree substitutes for in-market loans.

Keywords: Lending, small business, bank competition