Do small businesses still prefer community banks?

We formulate and test hypotheses about the role of bank type – small versus large, single-market versus multimarket, and local versus nonlocal banks – in banking relationships. The conventional paradigm suggests that “community banks” – small, single-market, local institutions – are better able to f...

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Bibliographic Details
Published in:Journal of banking & finance 2014-07, Vol.44, p.264-278
Main Authors: Berger, Allen N., Goulding, William, Rice, Tara
Format: Article
Language:English
Subjects:
Banking industry
Banks
Client relationships
Community banks
Government policy
Paradigms
Probability
Public relations
Relationships
Small and medium sized enterprises
Small business
Small business loans
Studies
Technology
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Summary:We formulate and test hypotheses about the role of bank type – small versus large, single-market versus multimarket, and local versus nonlocal banks – in banking relationships. The conventional paradigm suggests that “community banks” – small, single-market, local institutions – are better able to form strong relationships with informationally opaque small businesses, while “megabanks” – large, multimarket, nonlocal institutions – tend to serve more transparent firms. Using the 2003 Survey of Small Business Finance (SSBF), we conduct two sets of tests. First, we test for the type of bank serving as the “main” relationship bank for small businesses with different firm and owner characteristics. Second, we test for the strength of these main relationships by examining the probability of an exclusive relationship and main bank relationship length as functions of main bank type and financial fragility, as well as firm and owner characteristics. The results are often not consistent with the conventional paradigm, perhaps because of changes in lending technologies and deregulation of the banking industry.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2014.03.016