Two-Step Analysis of Standardized Versus Relationship Bank Lending to Small Firms

摘要

Since small firms have very limited access to the publicly traded capital markets, these firms are very dependent upon commercial banks for financing. This, coupled with small firms being a strong engine for growth in the U.S. economy, warrants an environment of efficient capital allocation to these firms promoted by adequate bank credit. In the past, lending to small businesses has been the province of small banks, as these banks possessed a comparative advantage in the small business loan market. That is, the structure of the smaller, simpler banking organization was more amenable to overcome the greater information asymmetries inherent in small firm financing. The information asymmetries were mitigated by the small bank's proprietary relationship with the small business borrower, through a process termed in the literature as relationship lending. However, technological advancements have narrowed that information gap, thus allowing large banking organizations to become more prominent in this market through standardized lending practices such as credit scoring. As consolidation in the financial service industry continues, banks have become larger, with the number of small banks shrinking. With this structural change in the financial sector, the question of adequate credit to small firms continues to be an important economic policy issue, as large and small banks supply funds under different lending techniques.