The changing role of small banks in small business lending
business borrowers. Small banks have a greater ability to monitor their borrowers, but large
banks have a lower cost of financing. The model in the paper shows why an increase in large
bank competition makes small banks especially valuable to borrowers of intermediate quality.
We then analyze bank balance sheet data by loan size and find results consistent with this
prediction. The results indicate that small, single-market banks increase the share of their
small business loans in the intermediate size category ($250,000 to $1 million) following large
bank entry into their market. These findings suggest that small banks will continue to serve
this intermediate segment of the small business loan market as competition from large banks
increases.
This paper studies how competition from large banks a affects small banks' lending to small
business borrowers. Small banks have a greater ability to monitor their borrowers, but large
banks have a lower cost of financing. The model in the paper shows why an increase in large
bank competition makes small banks especially valuable to borrowers of intermediate quality.
We then analyze bank balance sheet data by loan size and find results consistent with this
prediction. The results indicate that small, single-market banks increase the share of their
small business loans in the intermediate size category ($250,000 to $1 million) following large
bank entry into their market. These findings suggest that small banks will continue to serve
this intermediate segment of the small business loan market as competition from large banks
increases.