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