Changes

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 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.

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 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 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.