Changes
Jump to navigation
Jump to search
→The state of Small Banks
Since the recession, the NY Fed [https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci17-4.pdf] observed that small businesses have been notably slower to recover than their large counterparts. Especially since 2009, larger businesses have posted higher growth rates in sales, inventories, and fixed assets. Actually, small businesses have seen their fixed asset growth go negative for the first time since 2006. All things considered, slower sales, inventories, and investment culminated in sluggish recovery for small businesses. By extension, banks have been wary of spurious loans, especially to small business, as their credit ratings have been adversely affected in recent years.
===The state State of Small Banks===
Despite the significant credit rating deduction incurred by the recession, small businesses have been able to find loans from alternative sources. Traditionally, smaller banks have catered to small businesses unable to qualify for loans from institutional investors, or bigger banks. In 2010, small and community banks accounted for 48.1% of all small business bank loans, according to the Mercatus Center at George Mason University [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435206]. Consequently, small businesses have a vested interest in the well-being of their community banks. Unfortunately for small business, these community banks are disappearing at alarming rates.
Small banks have, since 1993, seen their total numbers fall by almost 50%. In 1993, over 11,000 banks were around. Nowadays, that number is closer to 6,000. Research suggests a relationship between this decline and other external factors . Primarily, it appears that many small banks simply cannot compete, and have dropped out of the market. A Mercatus Center report[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435206] shows that small banks' share of the domestic deposit market fell by 50% (from 40 to 20%) in the last 15 years. Meanwhile, the largest 5 banks have "picked up the slack" and acquired a current portion of 39.6%, contrary to their 19% holding in 2001. Beyond that, small banks' total assets have been halved since 2000, and don't show signs of improving. Smaller banks with consistently profitable operations have been acquired, so as to accommodate for higher regulatory costs, search costs, and transaction costs. In a nutshell, it is a difficult time for small banks. Trends indicate that consolidation is the most feasible route to maintain solvency in today's credit market.
===Overall Credit Loaning to Small Business===
As a result of small banks' overall decline in activity, overall credit loaning to small businesses has taken a hit. In 2006, the Wall Street Journal [http://www.wsj.com/articles/big-banks-cut-back-on-small-business-1448586637] indicated that the share of small business financing occupied by banks was 60%. Projections from the Wall Street Journal have the current level pinned at about 40%, but the SBA [https://www.sba.gov/sites/default/files/files/sbl_12study.pdf] claims that the figure is closer to 51%. Regardless of the actual number, it is clear that banks' share of small business finance has fallen at an alarming rate. Why? Well, there is limited quantitative research on this particular field. Instead, researchers have been proposing anecdotal theories to explain the stagnation in bank loaning. In a couple of sentences, large banks do not have a proper and comprehensive system of vetting the qualitative assets (non-balance sheet, credit rating) held by small businesses. Consequently, there is no reliable way to ensure that a small business could be a prudent debtor.
