NEWSRELEASE
For Release: May 4, 2007 Small Banks Profit From Relationship Lending WASHINGTON, D.C. – Market valuations of smaller publicly-held banks are
higher than they would otherwise be due to their investment in relationship
lending, according to a study issued today by the Office of Advocacy of the U.S.
Small Business Administration. The study examined the link between market
valuation and small business lending for 817 publicly-held banking organizations
during the period 1994 through 2005. “This study shows that for smaller banks it is worth the time and effort to
invest in relationship lending,” said Dr. Chad Moutray, Chief Economist for the
Office of Advocacy. “The market values the added profit that comes from
personally knowing small business customers, and being able to offer them loans
and services not obtainable from other banking organizations.” Many times small firms have little or no collateral and younger firms do not
have a credit history on which to base banking decisions. These firms may be
excluded from “transactional” financing decisions that require credit scoring
and other analysis of hard data used to evaluate the credit worthiness of the
business and its owner. On the other hand, “relationship” lending relies on the formation of
bank-firm relations, and requires an investment by the bank in costly
information acquisition and processing as well as the monitoring of firm
activities. Such investments result in somewhat higher fees and interest rates
for the small business customer to offset the cost of these banking activities.
Written by Dr. Joe Peek with funding from the Office of Advocacy, The
Value to Banks of Small Business Lending concludes, “small business lending
is a profitable market niche for small publicly traded banking organizations. .
. The evidence is consistent with these banks having a comparative advantage in
originating and monitoring small business loans compared to larger banking
organizations.” Dr. Peek will present his findings today to the Washington Area Finance
Association Conference at George Mason University. The Office of Advocacy, the “small business watchdog” of the federal
government, examines the role and status of small business in the economy and
independently represents the views of small business to federal agencies,
Congress, and the President. It is the source for small business statistics
presented in user-friendly formats, and it funds research into small business
issues. For more information and a complete copy of the study, visit the Office of
Advocacy website at
Contact: John McDowell, (202) 205-6941
SBA Number: 07-14 ADVO
Press Kit
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The Office of Advocacy of the U.S. Small Business Administration (SBA) is an independent voice for small business within the federal government. The presidentially appointed Chief Counsel for Advocacy advances the views, concerns, and interests of small business before Congress, the White House, federal agencies, federal courts, and state policy makers. For more information, visit
www.sba.gov/advo, or call (202) 205-6533.