Evidence is scarce for an impending small-business credit crunch due to bank mergers, researchers concluded at a recent conference, and Fed Governor Laurence Meyer said he doesn't expect one.
"Even if the merging institutions decrease their small-business lending substantially, the overall small-business credit in the market need not decline," Mr. Meyer told more than 200 academics and government officials at a New York University conference.
Mr. Meyer's remarks were prompted by the presentation of research papers suggesting ways to offset the decline in lending that might result from bank mergers.
Large banks have increased their small-business lending in recent years but have focused on loans of less than $100,000. Historically, community banks have been the most active in small-business lending. From 1984 to 1994, however, the number of banks with assets of less than $1 billion dropped from 14,200 to 10,024. At the same time the number of start-up banks fell from 391 in 1984 to 50 in 1994.
Those trends led academics and some policymakers to worry about the availability of credit in local markets when community banks are bought by larger institutions.
A study presented by the University of Virginia's James P. Weston tried to determine whether banks that merge increase or decrease their small- business lending.
Prof. Weston found that community banks acquired by other community banks increased their small-business lending at a faster rate than community banks not involved in a merger.
But he found no similar effect when large banks acquired a community bank or merged with another large bank.
Another study, by Lawrence Goldberg of the University of Miami, found that start-up banks lend more to small businesses than community banks open more than 20 years.
"If we worry that consolidation in the banking industry will lead to a reduction in small-business lending," Prof. Goldberg said, "an increase in charters for new banks can fill in the gaps."
Start-up banks more than three years old may make more loans because they want to have an immediate impact on the market and can respond quickly to demand, he said.
Prof. Goldberg said start-up banks also frequently hire experienced lenders from acquired banks and that these executives often have been active in small-business lending.
Robert DeYoung, an economist at the Office of the Comptroller of the Currency, also found that small-business lending declines at community banks in urban areas as the bank ages.
"A liberal chartering policy encourages entry by banks that are predisposed to making small-business loans," Mr. DeYoung said.
But Mr. Meyer said worries about the availability of small-business credit after the acquisition of a community bank are exaggerated.
The Federal Reserve is concerned about competition when banks in the same market merge but is rarely upset when banks acquire other banks to expand their geographical reach, Mr. Meyer said.
Many local banks step up small-business lending to gain market share after a competitor is acquired, Mr. Meyer said.
Despite consolidation in the industry, he said, community banks will continue to have a role in small-business lending because they are close to their borrowers.
"They have an information advantage and local community know-how that (are) hard to duplicate at a large financial institution," he said.
