Do Small Banks Have an Advantage in Lending? An Examination of Small Business Lending Performance for Large and Small Banks

28 Pages Posted: 16 Jan 2002

See all articles by David Carter

David Carter

Oklahoma State University - Stillwater - Department of Finance

James E. McNulty

Florida Atlantic University

James A. Verbrugge

University of Georgia - Department of Banking and Finance

Date Written: January 2002

Abstract

Consolidation in the banking industry has sparked concern about the survival of small banks. However, if small banks are better at processing credit information than large banks, they should continue to survive in a competitive environment. We evaluate risk-adjusted commercial loan yields (gross yields less net charge-offs and the risk-free rate) at small and large banks for 1996 through 1999. We find that risk-adjusted yields fall as the proportion of small business loans (i.e., original amounts less than $1 million) increase. However, smaller banks earn greater risk-adjusted yields than larger banks. Our results suggest that small banks make better choices from the available small business loans. This finding is consistent with the notion that these banks have an information advantage in evaluating credit and adds to our understanding of the intermediation process.

Keywords: Bank lending; Information advantage; Structure performance; Relationship banking

JEL Classification: G21, G28

Suggested Citation

Carter, David A. and McNulty, James E. and Verbrugge, James A., Do Small Banks Have an Advantage in Lending? An Examination of Small Business Lending Performance for Large and Small Banks (January 2002). Available at SSRN: https://ssrn.com/abstract=297007 or http://dx.doi.org/10.2139/ssrn.297007

David A. Carter (Contact Author)

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States
405-744-5104 (Phone)
405-744-5180 (Fax)

James E. McNulty

Florida Atlantic University ( email )

777 Glades Rd.
Boca Raton, FL 33341
United States
(561) 297-2708 (Phone)

James A. Verbrugge

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States
706-542-3657 (Phone)

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