Bank Consolidation and Small Business Lending: The Role of Community Banks

This paper examines how bank consolidation activity affected small business lending in local U.S. banking markets during two 3-year study periods, focussing on the role played by community banks in the process. During the 1994–1997 period, we find that consolidation activity involving big banks is associated with lower loan growth, whereas community bank consolidations and a greater presence of community banks in the market are associated with higher loan growth. During the 1997–2000 period, consolidation activity is either unrelated to small business loan growth or is associated with higher loan growth. In both study periods we find that, net of organization reclassifications due to consolidation or asset growth, the share of small business lending funded by community banks rose, particularly in markets undergoing consolidation.