Banking Market Concentration
MP A
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Munich Personal RePEc Archive
Banking Market Concentration and
Credit Availability to Small Businesses
Park, Yongjin
Connecticut College
March 2008
Online at http://mpra.ub.uni-muenchen.de/9265/
MPRA Paper No. 9265, posted 22. June 2008 / 05:46
Banking Market Concentration and Credit Availability to Small Businesses
JEL Classification: G21
Keywords: Bank Competition, Indebtedness, Small Business, Relationship
Banking
ABSTRACT
This paper examines how banking market concentration affects small businesses finance. Using the Survey of Small Business Finance, the empirical model show that bank concentration may adversely affect the amount of credit supplied to small businesses. We find that bank concentration decreases the L/C limits of firms significantly, while there is no statistically significant difference in L/C balance across banking markets. We also show that bank concentration lowers the overall debt-to-asset ratio of small firms that includes loans from nonbank institutions, suggesting that credit from non-bank institutions do not fully make up the effect of bank concentration.
1
1. Introduction
Over the past few decades, improvements in information technology, financial deregulation has contributed to create a more competitive environment and have encouraged an unprecedented consolidation in the banking sector. In the U.S., M&A activity in the financial institution sector has reduced the number of banks by more than one-third until the end of the 1990s. Consolidation in the banking industry has raised concerns among policymakers that this may lead to a reduced availability of credit for small businesses, primarily due to the decrease in the number of small banks specialized in this type of lending.
Empirical research on the effect of banking concentration on credit availability is relatively lacking and provides contradicting results. Petersen and Rajan (1995) show that small firms in
R
Munich Personal RePEc Archive
Banking Market Concentration and
Credit Availability to Small Businesses
Park, Yongjin
Connecticut College
March 2008
Online at http://mpra.ub.uni-muenchen.de/9265/
MPRA Paper No. 9265, posted 22. June 2008 / 05:46
Banking Market Concentration and Credit Availability to Small Businesses
JEL Classification: G21
Keywords: Bank Competition, Indebtedness, Small Business, Relationship
Banking
ABSTRACT
This paper examines how banking market concentration affects small businesses finance. Using the Survey of Small Business Finance, the empirical model show that bank concentration may adversely affect the amount of credit supplied to small businesses. We find that bank concentration decreases the L/C limits of firms significantly, while there is no statistically significant difference in L/C balance across banking markets. We also show that bank concentration lowers the overall debt-to-asset ratio of small firms that includes loans from nonbank institutions, suggesting that credit from non-bank institutions do not fully make up the effect of bank concentration.
1
1. Introduction
Over the past few decades, improvements in information technology, financial deregulation has contributed to create a more competitive environment and have encouraged an unprecedented consolidation in the banking sector. In the U.S., M&A activity in the financial institution sector has reduced the number of banks by more than one-third until the end of the 1990s. Consolidation in the banking industry has raised concerns among policymakers that this may lead to a reduced availability of credit for small businesses, primarily due to the decrease in the number of small banks specialized in this type of lending.
Empirical research on the effect of banking concentration on credit availability is relatively lacking and provides contradicting results. Petersen and Rajan (1995) show that small firms in