WASHINGTON -- Commercial banks could lose their dominant position in the small-business lending market and not even know what hit them, a prominent industry consulting group warned.

Reporting on a study her firm conducted for the Association of Reserve City Bankers, an analyst for Furash & Co. said the "commercial banking industry's traditional small-business franchise is at risk" to nonbank competitors and changing market conditions.

And with few exceptions, "The banks in our survey do not see the depth and nature of the nonbank threat to their small-business lending franchise," added Cynthia Glassman, director of research at the Washington-based firm.

|It Really Adds Up'

In an interview, Ms. Glassman said the changing nature of competition may be difficult for bankers to see because they operate in well-defined local markets while competitors from outside the industry market their products nationally.

"When a Merrill Lynch makes a push in commercial lending, it may not show up as real big in any one market," she said, "But across the country, it really adds up."

Most Banks, she added, don't have the same opportunities to market nationwide.

Ms. Glassman said bankers should be particularly wary of proposals under consideration in Congress to create a secondary market in small-business loans.

"The threat to banks of such programs is that they facilitate the same type of disintermediation that has drained large commercial financing out of the banking industry," Ms. Glassman wrote.

In the interview, she said banks should be particularly concerned about the development of a secondary market with implicit or explicit government guarantees.

"That will take the market away from intermediaries that make loans to hold in their portfolios, as banks do, and give it to those that originate loans to sell, rather than hold," she said.

Urges a Number of Steps

The result would be similar to the way in which the mortgage lending business was transformed by the secondary market agencies, shifting volume from thrifts to mortgage bankers, she said.

Ms. Glassman said banks, individually and as an industry, should take a number of steps to maintain their share of the small-business market:

* Continue to press for regulatory relief legislation.

* Support effort to require other types of lenders to make the same kind of fair-lending disclosures as banks do. Without such reporting by other, banks "will continue to take the heat" for problems such as the credit crunch.

* Reduce the "hassle factor" for customers by making regulatory impediments transparent as possible.

* Fight nonbank competitors by leveraging the industry's inherent advantages. For example, Ms. Glassman said, securities firms are viewed by businesses as companies that "want to sell you something. That's perception banks can market against."

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