SBA: Small Banks Profit From Relationship Lending

WASHINGTON, D.C. - Market valuations of smaller, publicly held banks are higher than they would otherwise be due to their investment in relationship lending, according to a study issued recently by the Office of Advocacy of the U.S. Small Business Administration.

The study examined the link between market valuation and small business lending for 817 publicly held banking organizations from 1994 through 2005.

Many times, small firms have little or no collateral and/or do not have a credit history. These firms may be excluded from "transactional" financing decisions that require credit scoring, the study reported.

On the other hand, "relationship" lending relies on the formation of bank-firm relations, and requires an investment by the bank in costly information acquisition and processing as well as the monitoring of firm activities. Such investments result in somewhat higher fees and interest rates for the small business customer to offset the cost of these banking activities.

The study: "The Value to Banks of Small Business Lending," was written by Dr. Joe Peek, with funding from the Office of Advocacy. It concludes: "small business lending is a profitable market niche for small publicly traded banking organizations... The evidence is consistent with these banks having a comparative advantage in originating and monitoring small business loans compared to larger banking organizations."

The Office of Advocacy, the "small business watchdog" of the federal government, examines the role and status of small business in the economy and independently represents the views of small business to federal agencies, Congress, and the President.

For info: www.sba.gov/advo.