Abstract
Among the issues raised by consolidation within the banking industry is a concern that small businesses will be less able to obtain credit as community banks are acquired by larger or non-local institutions. Community banks have traditionally been a major source of funding for small businesses. The impact of bank consolidation on credit availability may depend in part on whether the remaining community institutions expand their small business lending activities. This study examines whether credit unions have a propensity to extend business loans in markets that have experienced bank merger and acquisition activity. We find some evidence that credit unions are more likely to engage in business lending in markets characterized by greater bank merger and acquisition activity. Moreover, the estimated economic significance is meaningful in many of the specifications.
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Notes
Net Member Business Loan Balance (NMBLB) is defined as “the outstanding loan balance plus any unfunded commitments, reduced by any portion of the loan that is secured by shares in the credit union, or by shares or deposits in other financial institutions, or by a lien on the member’s primary residence, or insured or guaranteed by any agency of the federal government, a state or any political subdivision of such state, or subject to an advance commitment to purchase by any agency of the federal government, a state or any political subdivision of such state, or sold as a participation interest without recourse and qualifying for sales accounting under generally accepted accounting principles.” (12 CFR Part 723.21) The definition of NMBLB applies to both member and nonmember loans and participations.
See H.R. 2317, the “Credit Union Regulatory Improvements Act of 2005,” introduced in the House of Representatives on May 12, 2005 and HR 1537, Credit Union Regulatory Improvements Act of 2007, introduced in the House of Representatives on March 15, 2007.
For ease of exposition, we refer to acquisition activity involving banks. However, our measures of acquisition activity include both banks and thrifts.
An establishment is a single physical location where business is conducted or where services or industrial operations are performed (U.S. Bureau of the Census 2007). It is the equivalent of an enterprise only in the case of single-establishment firms. Ideally, we would use the ratio of employment to number of enterprises in the local market, but these data are unavailable.
Loans that are fully guaranteed by a federal or state agency are not considered member business loans. For loans that are partially guaranteed, such as SBA loans, the portion of the loan that is guaranteed is excluded from the calculation of business loan balances.
The definition of business loans in Tables 1, 2, and 3 (net member business loan balances) differs from that used in the logit models. Net member business loan balance is the primary measure of business lending that credit unions report on their call reports. However, it is unavailable prior to 2004.
Credit union business lending is also fairly concentrated. Thirty-six percent of all business loans were held by just 25 credit unions and the 100 most active institutions held a 64% share.
This estimate was formed by assuming that those credit unions with business lending would expand their NMBLB up to the statutory limit of 12.25%.
We would like to thank the referee for the suggestion of examining the response of banks and thrifts.
These measures of small business lending are based on the size of the loan, not the size of the borrower. Total small business loans are those with original amounts of $1 million or less.
There were too few observations to estimate the model for urban thrifts in small MSAs.
See for example, Plagge (2005).
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Acknowledgement
The authors would like to thank Drew Dhal, Mark Vaughn, participants at the 2005 Western Economic Association meetings and the 2004 meetings of the Financial Management Association for helpful comments and suggestions. Any errors are our own. The views expressed are those of the authors’ and should not necessarily be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.
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Ely, D.P., Robinson, K.J. Credit Unions and Small Business Lending. J Financ Serv Res 35, 53–80 (2009). https://doi.org/10.1007/s10693-008-0038-3
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DOI: https://doi.org/10.1007/s10693-008-0038-3