Economic Insights — Thanks in part to business credit cards, large banks dominate the market for small-business loans, but small local banks still compete in making loans where relationships still matter.
Conventional wisdom says that relationship lending, which has long been the purview of small local banks, is a thing of the past. To test this theory, Jim DiSalvo analyzed a data set comprising loans made to small businesses. He finds that large nonlocal banks are indeed the major small-business lenders in most large metropolitan areas—most likely because large (usually nonlocal) banks provide business cards, which are an important source of small-business financing. However, local banks (and large banks with a local branch) still play a role in making larger small-business loans such as commercial real estate loans, for which local knowledge and soft information are still important.
This article appeared in the Third Quarter 2021 edition of Economic Insights. Download and read the full issue.