THE EVOLUTION OF BANK LENDING TO SMALL BUSINESS

Lending to small firms traditionally has been a business served primar ily by the banking industry, which has recently undergone substantial consolidation, in part stimulated by the relaxation of barriers to int erstate mergers and interstate branching. As many banks grow in size a nd focus more on national and international markets, it is possible th at some lines of business, including small business lending, may be le ss profitable for them than other activities that exploit more fully t he advantages arising from economies of size and scope. This article e xamines how consolidation, along with the use of credit-scoring models for lending, may be reflected in recent patterns of small business le nding by banks. The authors find that the market for small business le nding has been substantially influenced both by the wave of bank conso lidations and by the adoption of efficiency-enhancing information tech nologies at banks. Using Call Report data, they show that the pattern of changes in small business lending following bank mergers is sensiti ve to the size of the banks involved, as well as to the degree to whic h the acquirer has chosen to specialize in small business lending.