A conference report prepared
by the Office of Economic Research of the U.S. Small Business
Administration's Office of Advocacy.
October 6, 1997
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Introduction
The U.S. banking industry
has been consolidating at a rapid rate over the last 15
years, largely because of the liberalization of state geographic
restrictions on branching and holding company acquisitions.
The pace of consolidation picked up in the first half of
the 1990s. For example, in 1994, 323 bank mergers (consolidations
of two or more bank charters) were consummated, involving
$720 billion in assets (17.9 percent of industry assets).
Bank holding company acquisitions (acquisitions in which
the banks retain their separate charters) numbered 326 and
involved $99 billion in acquired assets (2.4 percent of
industry assets). The trend toward increased merger and
acquisition (M&A) activity is likely to continue under
the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994, which allows essentially nationwide branching
beginning June 1, 1997. 1.
As the number of small banks
has declined, concern about the impact of these bank mergers
and acquisitions on small business lending (SBL) has increased.
Prior research has established a fairly strong inverse link
between banking institution size and the proportions of
bank assets lent to small businesses (see Tables A &
B). 2.
On the surface, these facts-that
banking consolidation has significantly reduced the number
of small banks and that large institutions make proportionately
fewer small business loans-would seem to suggest that the
total supply of bank credit to small businesses may fall
substantially. However, this simplistic analysis assumes
that small business lending propensities are static and
are determined solely by the size of the institution. This
hypothesis is rejected for the following reasons:
1. Mergers and acquisitions
are fundamentally dynamic events that may involve significant
changes in the business focus of the consolidating institutions.
Banks get involved in M&As because they want to do something
different, and the "something different" may be
more aggressive or less aggressive in lending to small business.
2. Other local banks or nonbank
lenders, such as finance companies, in the same local markets
may pick up any profitable loans that are no longer supplied
by the consolidated banking institutions. These other institutions
may also react to M&As with their own dynamic changes
in focus that could either increase or decrease their supplies
of small business loans.
Table A. Number of Banks by
Asset Size, 1994-1996
Bank Asset Size 1994 1995
1996
$100 Million 7,559 6,980 6,465
$100-$500 Million 2,514 2,521 2,548
$500 Million-$1 Billion 256 256 260
$1-$10 Billion 324 326 326
> $10 Billion 53 66 71
Total 10,706 10,149 9,670
Table B. Ratios of Small Business Lending in U.S. Banks,
1996
(Average per Bank)
Small Business Loans to
Total
Business
Assets Loans
All banks 11.4 70.9
Bank by asset size
$100 million 12.3 82.7
$100-$500 million 10.7 52.8
$500 million-$1 billion 6.7 31.7
$1-$10 billion 4.4 22.3
> $10 billion 2.3 15.6
Ratio expressed as a percent.
Thus, even if merging institutions
reduce their supplies of small business loans substantially,
the total supply of these loans in the local market need
not decrease.
The full impact of mergers
and acquisitions on small business lending can be evaluated
only by examining the following three effects on the acquired
and the acquiring banks: 3.
1. The static effect: the change
in small business lending from simply combining the balance
sheets of the smaller institutions into a larger pro forma
institution with combined characteristics.
2. The dynamic effects: (a)
the restructuring effect or change in small business lending
that follows from decisions to restructure the institution
in terms of its size and other characteristics after the
merger or acquisition and (b) the direct effect or change
in lending focus above and beyond that associated with the
changes in size and other characteristics from the static
and restructuring effects. 4.
3. The external effect: the
dynamic responses of other lenders to mergers or acquisitions
in the same local markets.
The five research papers presented at Advocacy's October
6, 1997, conference all attempted to address the issues
of the dynamic effects of bank mergers and acquisitions-that
is, how the participating banks changed focus after the
M&A activities. Estimates of external effects were attempted
in Berger's paper.
Most of the papers presented
used the same data sources. The small business lending information
from the Federal Reserve Board's Call Reports (Consolidated
Reports of Condition and Income), available since June 1993,
are utilized to examine the proportion of assets devoted
to small business lending before and after consolidation.
Bank balance sheets and income statement information, as
well as some bank structure information, are also taken
from the Call Reports. The National Information Center data
base (the NIC structure file) is the primary source for
the identification and dating of mergers, acquisitions,
bank failures, and de novo bank entry. The study by Berger
used a third data source, The Survey of Terms of Bank Lending,
for lending data for a longer time period.
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Summaries of the Five Papers 5.
I. "The Effects of Bank Mergers and Acquisitions
on Small Business Lending" by Allen Berger,
Anthony Saunders, Joseph Scalise and Greg Udell, presented
by Dr. Allen Berger of the Federal Reserve Board, Washington,
D.C. 6.
Data and M&A Coverage
Data from the Survey of Terms
of Bank Lending (STBL), which cover a much longer period
than the small business lending section of the Call Reports,
were used in the analysis. The database enabled the researchers
to measure the effects of most U.S. bank mergers and acquisitions
from the late 1970s through the early 1990s-more than 6,000
M&As involving more than 10,000 banks (some active banks
are counted multiple times). It also provided three years
of data after consolidation enabling analysis of the full
dynamic effects of M&As. (Note: The authors tried measuring
the effects of M&As after one year and sometimes found
quite different results, which are available in a revised
version of the paper). 7.
Static and Dynamic Effects
The authors used a structural
model to decompose the impact of M&As on small business
lending into several static and dynamic effects to identify
how M&As affect the credit supply process-that is, to
determine whether recently consolidated institutions behave
"statically" as in the "simplistic"
analysis described above, or whether they have a dynamic
change in business focus so that their lending differs from
that of other banks of the same size that did not recently
merge.
The External Effect
The impact of mergers and
acquisitions on lending by other banks in the same local
market was estimated. As noted earlier, other local banks
or nonbank lenders might pick up any profitable small business
lending dropped by consolidating institutions. (These effects
were not measured, however). In addition, other banks may
have their own dynamic changes in focus that affect their
supplies of small business loans in response to the change
in competitive conditions. 8.
Primary Empirical Results
- The static effect of consolidation,
which results in larger institutions, reduces small business
lending, consistent with the literature that shows that
large banks devote smaller portions of their portfolios
to SBL.
- The dynamic restructuring
and direct effects increase small business lending for consolidating
banks, offsetting some of the static effects. That is, managers
of consolidated banks tend to restructure and refocus their
policies and procedures in ways that increase SBL relative
to their size peers in some markets. For acquisitions (in
which the bank holding company buys the bank and leaves
charter unchanged), the dynamic effects fully offset the
static effect, so SBL does not decrease on average.
- The external effect tends
to increase small business lending by other banks in the
local market. These other banks may pick up profitable loans
that are dropped by merging institutions, or otherwise have
a dynamic reaction that increases their SBL supply. The
measured external effect is very large, and more than offsets
the effects of M&As on SBL by consolidating banks. As
noted, the external effect is relatively inaccurate, and
so should be used only as a qualitative indicator.
Changes in Small Business Lending,
1994-1995 (Billions of 1994
Dollars)
All Mergers (Consolidations
of bank charters)
Static Restructuring Direct
External Total
-25.8 3.5 2.6 48.6 28.9
All Acquisitions (Changes in
top-tier bank holding companies,
charters retained)
Static Restructuring Direct
External Total
-7.0 0.4 7.8 22.6 23.7
Total small business lending
in 1995 = $160.4 billion.
Conclusions
- The effects of bank mergers
and acquisitions are complex, with several offsetting static
and dynamic effects.
- The effects of mergers and
acquisitions on small business lending depend on the type
of M&A, size of institutions involved, intrastate versus
interstate nature, and many other factors.
- The external effect-the reactions
of other banks in the local markets-seems to be quite strong
and positive, offsetting much if not all of the reductions
in supply of SBL by the consolidating institutions, but
this effect is most difficult to pin down precisely.
- Finally, even if all of the
reductions in SBL were offset by other banks, many of the
borrowers may still suffer advance short-term costs in terms
of temporary disruptions in credit availability and higher
rates or more collateral requirements until their new banking
relationships mature.
II. "The Impact
of Structural Change in the Banking Industry on Small Business
Lending" by James Kolari and Asghar Zardkoohi,
presented by Professor James Kolari of Texas A&M University.
Scope and Methodology
The study first reviewed historical data on the relationship
between small business lending and various banking characteristics.
The research hypothesis that small business lending is related
to different variables that capture bank structure is tested.
Second, recent bank mergers and acquisitions are examined
for their potential effects on changes in small business
lending. The main research hypothesis is that changes in
small business lending activity before and after acquisition
are related to different variables that reflect bank structure.
In this regard, there are two
competing hypotheses: (1) the size hypothesis contends that
target banks benefit from joining a larger aggregate organization,
which results in increased credit supplies to smaller bank
customers; (2) the siphoning hypothesis argues that the
larger aggregate organization will spirit away funds from
the smaller target bank or reallocate credit consistent
with the objectives of the parent company.
Finally, in addition to the
conventional data sources discussed in previous sections,
a national survey of bankers involved in mergers and acquisitions
was conducted to find out their experiences concerning the
effects of structural change on small business lending practices.
Highlights
Consistent with other published research on this subject,
the authors found that the empirical results are mixed.
However, the weight of the evidence points to more negative
than positive effects of banking industry consolidation
on small business lending. Briefly stated, some of the findings
of the study are as follows.
Regarding the relationship
between small business lending and different variables that
capture bank structure, the findings are: A. With respect
to bank holding companies, holding a number of factors constant
in a multivariate context, the authors found that: (1) member
banks tended to make more small business loans as a proportion
of total assets compared with independent banks; (2) holding
asset size constant, members of large BHCs tended to have
lower SBL ratios than members of small BHCs; (3) banks in
states previously allowing national entry of MBHCs or allowing
statewide MBHCs tended to have lower SBL ratios; and (4)
more liberal state laws on bank expansion tend to encourage
a greater degree of bank consolidation than in other states.
B. For branch banks, the results
were similar to those for BHCs in many ways: (1) Branch
banks tended to make more SBLs than banks with no branches;
(2) large branch bank organizations tended to have lower
SBL ratios than small branch bank organizations; and (3)
states allowing statewide branching tended to have lower
SBL ratios compared to states with limitations on statewide
branching
Regarding the after-merger
activities of a sample of bank targets and buyers involved
in acquisitions in the second half of 1993 and 1994, the
findings were:
C. (1) The total asset size
of the target banks had a significant positive relationship
with changes in SBL ratios before and after bank acquisitions;
that is, the evidence tended to support the size hypothesis
in which more loans are associated with greater size, rather
than the siphoning hypothesis, in which there are fewer
loans because of the "siphoning away" of only
the most creditworthy. (2) Evidence on whether or not banks
that were independents or members of one-bank holding companies
before acquisition changed their SBL ratios after being
purchased by a larger organization was mixed, such that,
at least in the short run, no clear inferences on how structural
change affects small business lending activity could be
made.(3) Analyses of aggregate data for buyers and targets
in acquisitions and mergers revealed that, when targets
of simpler organizational forms join more complex organizations
(i.e., large BHCs and branch banks), there are greater increases
in small business lending compared with targets of complex
organizations. This short-run evidence again tends to support
the size hypothesis, rather than the siphoning hypothesis.
Moreover, intrastate mergers are more beneficial to small
business lending than interstate mergers, which can be interpreted
to mean that mergers across state lines are not motivated
by increasing access to the small business loan market.
Such interstate mergers are more likely motivated by the
desire to expand a banking organization's large business
loan market.
Finally, the results of a survey
of bankers involved in mergers and acquisitions indicated
the following results:
D. Market share has not been
an important motivation for most bank mergers and acquisitions.
However, gaining entry into a new market, achieving higher
operating efficiency, and profitability were important factors.
Many respondents reported an increase in small business
loans (less than $250,000) and medium business loans ($250,000-$1million)
because of their mergers or acquisitions. Fewer than 10
percent of the respondents reported a decrease in their
small business loans as a result of a structural change.
Also, fewer than 10 percent of the respondents reported
an increase in their large business loans. Finally, four
characteristics of the loan applicants seem to play a very
important role in the credit decision process of a relatively
large majority of the respondents before and after merger
or acquisition: cash flow, financial ratios, collateral,
and, most important, character of the manager of the borrowing
firm. Moreover, results indicate that a greater percentage
of the respondents experienced no change in the following
factors associated with small business loans: profitability,
risk of default, number or dollar value, finance charges,
approval rate, time to process loans, and offering of related
loans. Thus, bank mergers and acquisitions do not appear
to change the credit decision process for small business
loans.
Conclusions
In general, the weight of
the evidence in this study and those of other researchers
is more negative than positive in terms of the potential
effects of banking industry consolidation on small business
lending. Apparently, small firms across the country can
expect some difficulties in obtaining bank credit as the
banking industry undergoes a period of structural change
and resultant adjustments in competitive market conditions.
Whether these negative effects are short-run or long-run
in nature is not possible to discern from the data at this
time. Future research is needed to further examine the effects
of on-going consolidation on small business credit over
time.
III. "Do Bank Mergers Reduce Lending to Businesses
and Farmers?" by Dr. William Keaton of the
Federal Reserve Bank of Kansas City
Data and Methodology
In order to extend the time
span of the impact analysis of M&A activities in the
investigation, Keaton confines his studies of the after
effects on business lending to small banks-banks whose loans
are by definition small business loans. This is necessary
because small business lending data-loans classified by
loan size-became available only in 1993.
Findings
His findings provide partial
support for the claim that small banks acquired by larger
or distant organizations reduce their farm and business
lending. However, the declines in lending need not be harmful
if they are offset by increased lending at other banks in
the same market or if they reflect a reallocation of credit
to more profitable markets.
Most acquisitions of small
banks in the 10th District states during the last decade
either shifted ownership to distant markets or made the
banks junior partners in the new organizations. Lending
tended to fall when out-of-state companies acquired banks
owned by urban holding companies, and to a lesser degree,
when urban banks became junior partners in large urban organizations.
Conclusions
In some mergers, small banks
have changed hands without becoming further removed from
the center of decisionmaking or assuming a lesser role in
the new organization. In many other cases, however, the
ownership of banks has shifted to distant locations and
banks have become junior partners in large organizations,
generating fears that the new owners will ot make credit
decisions as efficiently or will prefer to invest the banks'
deposits in other ways.
Evidence provides partial support
for these concerns. A majority of the acquired banks that
did become junior partners or had to report to distant or
out-of-state owners did tend to reduce farm or business
loans. This was true for out-of-state acquisitions of banks
owned by urban holding companies, and to a lesser extent
for in-state acquisition, in which urban banks became junior
partners in larger urban organizations. 9.
IV. "The Effects of Interstate Banking on Small
Business Lending," by Professor Joe Peek,
Boston College, Boston, Mass. 10.
Scope and Methodology
Most of the data for this
study are taken from two sources, the Consolidated Reports
of Condition and Income (Call Reports) and the National
Information Center (NIC) data base. The bank sample includes
all FDIC-insured commercial and state-chartered savings
banks in the United States for which complete data are available.
The data set is organized by bank observations and by the
two sub-periods between the three Call Reports containing
the small business loan survey data: June 1993, June 1994,
and June 1995. These surveys report small business loan
data in three size categories: loans of $100,000 or less,
loans of more than $100,000 through $250,000, and loans
of more than $250,000 through $1 million. In order to minimize
problems with reporting errors, this study uses only the
$250,000 or less and $1 million or less loan categories
as the definitions of small business loans.
The statistical estimation
is based on a specification that attempts to explain the
growth in a bank's small business loan portfolio, controlling
for bank-specific characteristics, regional banking market
characteristics, and regional economic activity. By including
banks that made no merger or acquisitions, banks with a
change in ownership, and banks that did make merger/acquisitions
during the sub-period in the same equation, one can test
for differences in the growth in small business loan portfolios
across these bank categories.
Findings
The primary findings of the
study are:
A. Tendencies
-Most of the shrinkage in the number of banks has occurred
among the smaller banks;
-De novo entry has offset little
of this consolidation; -Shrinkage in the number of banks
has occurred across most Federal Reserve Districts;
-No simple pattern exists between
the degree of shrinkage and the share of small banks in
a district;
-The most prevalent type of
merger involves combining two or more small banks;
-In roughly half the mergers,
the acquirer has a small business loan portfolio share greater
than that of the target bank being purchased;
-In approximately one-half
the mergers, the surviving bank increased its holdings of
small business loans during the period immediately following
the merger.
B. Results from statistical estimations
1. Change in ownership without
merger
The implications of a change
in ownership for small business lending seem to be sensitive
to the relative degree of small business lending specialization
of the acquired bank. If the bank was quite involved in
the small business loan market prior to the change in ownership,
the effect is likely to be detrimental to credit availability
to its small business loan customers. 2. Bank mergers
The degree to which the acquirer
bank was committed to small business lending prior to the
merger, as well as the acquirer's size, are important determinants
of the willingness of the surviving bank to lend to small
businesses subsequent to the merger. The evidence for merger/acquisitions
is consistent with a preferred habitat hypothesis in which
banks seek to partially offset any merger-related shock
to their small business loan portfolio share subsequent
to a merger in order to reestablish their preferred degree
of specialization in small business lending.
Conclusions
The merger/acquisition activities
occurring in the banking industry have raised concerns of
reduced availability of credit to small businesses. While
conventional wisdom assumes that most mergers consist of
larger banks with relatively few small business loans acquiring
smaller target banks that primarily lend to the small business
sector, the reality is quite different. In almost half the
acquisition observations in this study, the acquirer had
a larger portfolio share of small business loans than its
target(s).
Subsequent to a merger, surviving
banks do tend to revert towards the pre-merger small business
loan portfolio share of the acquirer. Thus, if the acquirer
is an active small business lender that has chosen to focus
on relationship lending to smaller borrowers, the acquisition
could increase the small business lending of the consolidated
institution. However, if the acquirer has not focused on
small business lending, the merger is more likely to reduce
credit extended to small businesses from the consolidated
institution. While larger institutions do tend to have a
smaller portfolio share of small business loans, large institutions
that have focused on small business lending are likely to
maintain that focus. Thus, when considering the implications
of bank acquisitions on small business lending, the portfolio
share of small business lending of the acquirer may be as
important as the acquirer's size.
V. "Small Business Lending and the Changing
Structure of the Banking Industry" by Philip
E. Strahan and James Weston, presented by James Weston of
the University of Virginia.
Data and Methodology
The authors approached the
issue by looking at the after effects of the banking company
as a unit rather than looking at individual banking units
of the consolidated organization. The intra-company transfer
of funding and lending activities is therefore fully captured.
The authors investigated two
potential opposing influences on small business lending
associated with changes in the size distribution of the
banking sector-namely: (1) the diseconomies of scale associated
with small business lending that may increase lending costs
as the size of banking company increases; and (2) the size-related
diversification that may enhance small business lending.
Findings
By emphasizing banking company
size rather than bank unit size, the study concluded that
diversification enhances bank lending, by both large and
small banks, as size increases rather than reducing small
business lending because of increasing costs caused by organizational
diseconomies. Specifically, "Consolidation among small
banking companies serves to increase bank lending to small
businesses, while other types of mergers and acquisitions
have no effect." The study also found that "small
business lending may increase with bank size and complexity."
Conclusions
The findings of the five papers
presented at the conference show much agreement about the
effects of bank mergers on small firm lending. It was generally
agreed that:
1. Lending by large banks to small businesses will always
remain very important. Merger and acquisition activities
contributed to growth in small business lending on many
occasions, particularly when the surviving bank had a focus
on small business lending. This was especially true when
small and medium-sized banks merged.
2. The effects of bank mergers and acquisitions on small
business lending depend on the type of M&A, size of
institutions involved, intrastate versus interstate nature
of the bank, and many other factors.
3. In the longer run, the external impacts, the impacts
on small business lending caused by responses from other
suppliers in the market, will be most significant in determining
the impact of a merger or acquisition on small business
lending. Berger's work contributes much to the discussions
on this issue. However, as Dr. Berger stated, more work
and better data are needed to provide quantifications of
the external impacts.
There were disagreements about the differential impacts
of mergers and acquisitions on small business lending with
respect to different types of banking consolidations among
banks of different structures and characteristics-e.g.,
in-state versus out-of- state acquirers, urban versus rural
targets, large in-state versus large out-of-state bank holding
companies. Some studies reported positive effects; others
reported negative impacts. One possible explanation is related
to the size definition of small business loans. Those studies
reporting positive impacts seemed to define small business
loans in larger amounts, e.g., loans under $1 million-thereby
enhancing the positive impact of . By defining small business
loans as loans under 1 million, the positive impact of a
small bank joining a larger acquirer is enhanced. Many small
acquired banks were able to expand small business lending
to the larger small business loan groups, increasing the
share of small business loans to the total assets of the
consolidated institution. 11. On the other hand, when small
business loans are defined as loans under $100,000, some
of the positive effect of mergers and acquisitions on the
small business lending of small acquired banks may disappear.
Finally, it appears that commitment
to small business lending by a banking organization is one
of the most important factors determining the after-effects
of merger and acquisition activity. If large banks remain
committed to the small business loan market, the acquisition
of small banks actively engaged in small business lending
will not reduce the volume of small business lending in
the market. That is, the ratio of small business loans to
total assets for this branch will remain high while small
business loans to total assets for the whole bank holding
company will remain low, although slightly higher because
of the addition of small business loans from the new acquisition.
Total small business loans by the new bank will not be lower.
Another pertinent question
to ask is whether a large bank may not find it profitable
to focus on some market segments that were served by the
target banks, i.e., very small loans, highly relational
bank loans, and loans in a very small rural market area.
The high costs for a very large bank to serve this type
of market could force it to withdraw from the market after
a merger or acquisition.
Topics for Future Research
1. Extensive research is required on how the acquired banks
and the acquiring banks behave after the merger and acquisition
activities over longer time periods, especially during different
business cycles. There is a need for annual data on the
lending as well as rejection of loan applications so that
researchers can track the development of lending after the
merger or acquisition. A survey of both banks and their
customers is needed on an annual basis.
2. More knowledge of alternative
funding sources in a given market-for a better understanding
of the nature and magnitude of "external effects"
after the merger and acquisition activities.
3. More work on the effects
of bank consolidation because of the heterogeneity of acquiring
banking organizations.
4. The issue of credit scoring
needs more research. As a new technique that facilitates
small business lending by large banks, credit scoring could
alleviate the depressive impact on small business lending
of merger and acquisition activities. An example is Wells
Fargo Bank of California. The question is whether this promotion
by large banks would end up taking away the most profitable
business opportunities from many small banks, thus reducing
their chance for survival or, would it create new demand
for bank loans by small firms.
5. Another new technique that
could affect large bank lending is the securitization of
business loans. The extent to which large banks take advantage
of this development and thus increase lending to small business
should be explored.
6. Development of a database
linking the borrowers and the lenders would be desirable
for a better understanding of borrowing and lending behaviors
of small businesses and post-merger large banks. This idea
was suggested by research participants of the conference.
7. More careful study of the
sub-market, the very small market for micro loans under
$100,000.
While the positive effect of external impacts on small business
lending is promising, it is important to examine further
the effects on small business operations caused by the "temporary"
disruption in the supply of funding. For example, if it
takes two to three years for the market supply to fully
respond to the shortage in supply caused by the withdrawal
of a bank because of a merger or acquisition will the affected
small firms have the internal resources to ride through
the storm?
Final Remarks
In his concluding remarks,
Dr. Berger said, "We are fairly uncertain what the
effects of future M&As are likely to be because this
is a relatively new field of research, the market and regulatory
conditions under which M&As occur are changing and are
likely to continue to change, and the external effect is
most difficult to measure. More research is needed on the
total supply effects of M&As." 12.
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1. For M&A activities in
1994-1996, see Joe Peek and Eric Rosengren, "Bank Consolidation
and Small Business Lending: It's Not Just Bank Size That
Matters," presented at the Conference on the Economics
of Small Business Financing, Stern School of Business, New
York University, May 22-23, 1997.
2. Large institutions invest
a relatively smaller share of assets in small business loans
for a number of reasons: (1) small institutions are generally
limited to small business loans and cannot make large business
loans because of legal lending limits and problems of diversification;
(2) large institutions may be disinclined to extend relationship-driven
small business loans because of Williamson (1967, 1988)
type organizational diseconomies associated with producing
such loans along with the transaction-driven large loans
and capital market services in which large banks specialize;
and (3) the policies and procedures associated with dealing
with small, informationally opaque borrowers may be very
different from those associated with providing credit to
large, informationally transparent borrowers, and it may
be costly to employ both types of policies and procedures
in the same organization. (See Allen Berger, Anthony Saunders,
Joseph Scalise, and Greg Udell, "The Effects of Bank
Mergers and Acquisitions on Small Business Lending,"
revised draft, May 1997.)
3. See Berger, et al., "The
Effects of Bank Mergers and Acquisitions on Small Business
Lending."
4. These two effects were discussed
in Berger's paper as the second and third effects. See Berger,
et al.
5. In order of presentation.
See the Conference Agenda at end of report.
6. The following discussion
is based primarily on Berger's presentation outline.
7. A disadvantage of the STBL
is that it is a survey data base covering a sample of some
350 banks, rather than the universe of banks for each period
(as is the case for the Call Reports). Nevertheless, the
STBL data can be used to predict lending for all banks (as
discussed in detail in the paper). The STBL and the small
business lending section of the Call Report generally yield
the same qualitative conclusions, so perhaps the data differences
are not so important.
8. As Berger stated: "Our
external effect is imprecisely measured for two reasons.
We do not include nonbank lenders, and we cannot form the
same type of structural model with static and dynamic effects
as we do for the banks engaging in M&As because it is
too difficult to trace the effect of every M&A on every
other bank individually. We therefore treat our external
effect primarily as a qualitative indicator of how other
banks in the market tend to react to M&As, rather than
as a precise quantitative estimate. That is, we use the
measured external effect to determine whether there is likely
a substantial reaction by other local banks that may offset
or augment the SBL effects of M&As." Berger, et
al, op. cit.
9. Keaton concluded with the
following caveat: "It is possible that the banks continued
to originate loans to small and medium enterprises (SMEs),
but transferred those loans to other banks in the new organization.
Other banks in the same area could also respond to fill
the demand, leaving total credit to small business unchanged.
Finally, the acquiring banks, though reducing the supply
of loans in a specific market, could increase loans in other
more profitable small business markets where borrowers had
more productive uses of their funds." Keaton, op.cit.
10. See also Joe Peek and Eric
Rosengren, "Bank Consolidation and Small Business Lending:
It's not Just Bank Size That Matters," presented at
The Conference on the Economics of Small Business Finance,
New York University, Stern School of Business, New York,
N.Y., May 22-23, 1997.
11. A small bank with assets
under, say, $200 million and a net worth of, say, $20 million
(for a capital ratio of 10%) will be hard pressed to make
a small business loan in the amount of $500,000 to $1 million.
A merger would allow this bank to expand into this market.
12. Berger, et al.
*Last Modified:
3-4-2001