Lending on main street: Challenges and opportunities for small banks-before, during, and after the financial crisis
Lending on main street: Challenges and opportunities for small banks-before, during, and after the financial crisis
Saturday, October 10, 2015: 9:00 AM
The ongoing evolution of the small business lending sector presents both challenges and opportunities for community banks. There is a growing body of research examining how the financial crisis and new regulations have translated to a consistent decline in small business lending by community banks. Beginning in the 1990s, competition from large banks began to increase their market share at the expense of community banks. Ten years or more before the financial crisis, getting a standard commercial term loan from the bank down the street began to lose its place as the dominant choice for small businesses seeking credit.
The financial crisis served to accelerate some of those trends, setting the stage for a new post-crisis landscape. Using Federal Reserve data, this paper demonstrates that small businesses increasingly used real estate as collateral for loans. Subsequently, as the economy and housing market began to recover, large banks leveraged technology to compete for smaller commercial borrowers as they searched for lending opportunities.
This paper also examines the rise of alternative and nonbank lenders over the past several years. Most recently, nonbank and alternative lenders have begun to compete with banks by introducing sophisticated technologies and new underwriting methods. These lenders typically issue small business loans electronically, and with minimal processing time, across a range of sizes, terms and borrower risk profiles. In a bellwether development, non-lender organizations – including payment processors – have begun to harness databases of borrower information to offer cash-flow loans and other credit products.
In the post-crisis environment, evidence suggests that community banks face a series of challenges and unique opportunities. In addition to rising competition from both large banks and nonbank lenders, new banking rules play a secondary role. Post-crisis capital rules and banking standards have translated to less flexibility for community banks, especially relative to unregulated and nonbank lenders. This paper also examines the emerging examples of banks partnering with alternative lenders to fund qualifying loans originated through online platforms.
The financial crisis served to accelerate some of those trends, setting the stage for a new post-crisis landscape. Using Federal Reserve data, this paper demonstrates that small businesses increasingly used real estate as collateral for loans. Subsequently, as the economy and housing market began to recover, large banks leveraged technology to compete for smaller commercial borrowers as they searched for lending opportunities.
This paper also examines the rise of alternative and nonbank lenders over the past several years. Most recently, nonbank and alternative lenders have begun to compete with banks by introducing sophisticated technologies and new underwriting methods. These lenders typically issue small business loans electronically, and with minimal processing time, across a range of sizes, terms and borrower risk profiles. In a bellwether development, non-lender organizations – including payment processors – have begun to harness databases of borrower information to offer cash-flow loans and other credit products.
In the post-crisis environment, evidence suggests that community banks face a series of challenges and unique opportunities. In addition to rising competition from both large banks and nonbank lenders, new banking rules play a secondary role. Post-crisis capital rules and banking standards have translated to less flexibility for community banks, especially relative to unregulated and nonbank lenders. This paper also examines the emerging examples of banks partnering with alternative lenders to fund qualifying loans originated through online platforms.