Small banks are seizing on industry consolidation to snare a bigger piece of the small-business loan market, four researchers find.

Two Colorado State University professors teamed up with two Federal Reserve Bank of Kansas City economists to study small-business lending in Colorado from 1994 to 1996-a time when five large, out-of-state banking companies controlled more than 55% of the assets.

In-state institutions with $200 million of assets or less held less than 25% of the state's banking assets but increased their share of the small- business loan market to 52.4% from 46%. Large banks lost market share during the period.

The wide-ranging study uses Colorado as an example of what's happening nationally: Smaller banks offer customized service, and larger banks use technology to automate small-business lending.

Looking ahead, Richard J. Sullivan and Kenneth R. Sprong of Colorado State and Richard D. Johnson and Ronnie J. Phillips of the Kansas City Fed predict that big banks will return to the market if the economy slows.

"Given an economic contraction, large banks may become more competitive," Mr. Johnson says.

For a copy of "Small Business Lending by Commercial Banks in Colorado, 1994 to 1996," call 970-491-6432.

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Section 20 securities units are riskier and produce fewer profits than banking subsidiaries, according to Simon Kwan, a senior economist at the Federal Reserve Bank of San Francisco.

However, Mr. Kwan-using data from a sample of the 23 domestic banking companies with section 20 securities subsidiaries-also finds that section 20 subsidiaries can diversify banking companies' risk exposure.

For a copy of "Securities Activities by Commercial Banking Firms' Section 20 Subsidiaries: Risk, Return, and Diversification Benefits," call 415-974-2163 or visit www.sf.frb.org.

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Discrimination in mortgage lending would be better detected if regulators focused on "overages," writes Stanley D. Longhofer.

The Federal Reserve Bank of Cleveland economist explains that an overage occurs when the total points paid by a borrower exceed those required by the lender to originate the loan. "Fair-lending compliance should be measured through statistical comparisons of the relative frequency and magnitude of overages across groups," he writes.

The current yardstick, the annual percentage rate charged, is a misleading measure of pricing discrimination because it ignores the voluntary tradeoff borrowers make on interest rates and points paid at closing, according to Mr. Longhofer.

For a copy of "Measuring Pricing Bias in Mortgages," visit www.clev.frb.org.

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