US Federal Reserve Paper – Is Small Business Lending Valuable to Banks?

The consolidation of individual U.S. bank charters has resulted in both a shrinkage in the number of banks and an increase in their average size. A well-known concern is the effect on the availability of credit to small and midsize enterprises (SMEs) that, being too small to efficiently access national credit markets directly, rely on financial intermediaries, especially banks. A less well-known concern is the potential adverse effect on the shareholders of the surviving banking organization.

US-Fed-Boston-SME Banking-Report-Fall-2014-01an

Given the inverse relationship between bank size and the portfolio share of small business loans, the ongoing consolidation in the banking industry will tend to shrink the share of small business loans in the portfolio of surviving entities. But in addition to possibly impairing credit availability to SMEs, consolidation may destroy value for shareholders because the relationship-lending expertise of the smaller banks may be deemphasized.

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SOURCE: BostonFed.org