Hostname: page-component-586b7cd67f-vdxz6 Total loading time: 0 Render date: 2024-11-28T14:59:24.608Z Has data issue: false hasContentIssue false
  • English
  • Français

Cookie Cutter vs. Character: The Micro Structure of Small Business Lending by Large and Small Banks

Published online by Cambridge University Press:  06 April 2009

Rebel A. Cole ,
Lawrence G. Goldberg  and
Lawrence J. White
Rebel A. Cole
Affiliation:
[email protected], Department of Finance, DePaul University, 1 East Jackson Boulevard, Chicago, IL 60604;
Lawrence G. Goldberg
Affiliation:
[email protected], Department of Finance, University of Miami, P.O. Box 248094, Coral Gables FL 33124;
Lawrence J. White
Affiliation:
[email protected], Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012.
Get access Rights & Permissions [Opens in a new window]

Abstract

The informational opacity of small businesses makes them an interesting area for the study of banks' lending practices and procedures. We use data from a survey of small businesses to analyze the micro level differences in the loan approval processes of large and small banks. We provide evidence that large banks ($1 billion or more in assets) employ standard criteria obtained from financial statements in the loan decision process, whereas small banks rely to a greater extent on information about the character of the borrower. These cookie-cutter and character approaches are compatible with the incentives and environments facing large and small banks.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 2 , June 2004 , pp. 227 - 251
Copyright
Copyright © School of Business Administration, University of Washington 2004

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Becker, G. S.The Economics of Discrimination, 2nd ed.Chicago, IL: Univ. of Chicago Press (1971).CrossRefGoogle Scholar
Berger, A. N.; Goldberg, L. G.; and White, L. J.. “The Effects of Dynamic Changes in Bank Competition on the Supply of Small Business Credit.” European Finance Review, 5 (2001), 115–139.CrossRefGoogle Scholar
Berger, , A. N.; Kashyap, A. K.; and Scalise, J. M.. “The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been.” Brookings Papers on Economic Activity, 2 (1995), 155–218.Google Scholar
Berger, A. N.; Rosen, R. J.; and Udell, G. F.. “The Effect of Market Size Structure on Competition: The Case of Small Business Lending.” Working Paper #WP-01-10, Federal Reserve Bank of Chicago, Research Department (2001).Google Scholar
Berger, A. N.; Saunders, A.; Scalise, J. M.; and Udell, G. F.. “The Effects of Bank Mergers and Acquisitions on Small Business Lending.” Journal of Financial Economics, 50 (1998), 187–229.CrossRefGoogle Scholar
Berger, A. N., and Udell, G. F.. “Securitization, Risk, and the Liquidity Problem in Business.” In Structural Change in Banking, Klausner, M. and White, L. J., eds. Homewood, IL: Business One Irwin (1993), 227–291.Google Scholar
Berger, A. N., and Udell, G. F.. “Relationship Lending and Lines of Credit in Small Firm Finance.” Journal of Business, 68 (1995), 351–381.CrossRefGoogle Scholar
Berger, A. N., and Udell, G. F.. “Universal Banking and the Future of Small Business Lending.” In Universal Banking: Financial System Design Reconsidered, Chicago, IL: Irwin (1996), 558–627.Google Scholar
Berger, A. N., and Udell, G. F.. “The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle.” Journal of Banking and Finance, 22 (1998), 613–637.CrossRefGoogle Scholar
Berlin, M. “For Better and for Worse: Three Lending Relationships.” Business Review, Federal Reserve Bank of Philadelphia (11/12 1996), 3–12.Google Scholar
Carey, M.; Post, M.; and Sharpe, S.. “Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting.” Journal of Finance, 53 (1998), 845–878.CrossRefGoogle Scholar
Cole, R. A. “The Importance of Relationships to the Availability of Credit.” Journal of Banking and Finance, 22 (1998), 959–977.CrossRefGoogle Scholar
Cole, R. A., and Wolken, J. D.. “Sources and Uses of Financial Services by Small Businesses: Evidence from the 1993 National Survey of Small Business Finances.” Federal Reserve Bulletin, 81 (1995), 629–670.Google Scholar
DeYoung, R.; Goldberg, L. G.; and White, L. J.. “Youth, Adolescence, and Maturity of Banks: Credit Availability to Small Business in an Era of Banking Consolidation.” Journal of Banking and Finance, 23 (1999), 463–492.CrossRefGoogle Scholar
Gilbert, A. “Nationwide Branch Banking and the Presence of Large Banks in Rural Areas.” Review, Federal Reserve Bank of St. Louis, 82 (2000), 13–28.Google Scholar
Goldberg, L. G., and White, L. J.. “De Novo Banks and Lending to Small Business: An Empirical Analysis.” Journal of Banking and Finance, 22 (1998), 851–867.CrossRefGoogle Scholar
Greene, W.Econometric Analysis, 3rd ed.Upper Saddle, NJ: Prentice-Hall (1997).Google Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Keeton, W. R. “Multi-Office Bank Lending to Small Business: Some New Evidence.” Economic Review, Federal Reserve Bank of Kansas City, 80 (1995), 45–57.Google Scholar
Levonian, M. E., and Soller, J.. “Small Banks, Small Loans, Small Business.” Working Paper, Federal Reserve Bank of San Francisco (1995).Google Scholar
Nakamura, L. I. “Commercial Bank Information: Implications for the Structure of Banking.” In Structural Change in Banking, Klausner, M. and White, L. J., eds. Homewood, IL: Business One Irwin (1993), 131–160.Google Scholar
Peek, J., and Rosengren, E. S.. “Small Business Credit Availability: How Important is Size of Lender?” In Universal Banking: Financial System Design Reconsidered, Saunders, A. and Walter, I., eds. Chicago, IL: Irwin (1996), 628–655.Google Scholar
Petersen, M. A., and Rajan, R. G.. “The Benefits of Lending Relationships: Evidence from Small Business Data.” Journal of Finance, 49 (1994), 3–37.CrossRefGoogle Scholar
Petersen, M. A., and Rajan, R. G.. “The Effect of Credit Market Competition on Lending Relationships.” Quarterly Journal of Economics, 110 (1995), 407–443.CrossRefGoogle Scholar
Petersen, M. A., and Rajan, R. G.. “Does Distance Still Matter? The Information Revolution in Small Business Lending.” Journal of Finance, 57 (2002), 2533–2570.CrossRefGoogle Scholar
Strahan, P. E., and Weston, J. P.. “Small Business Lending and Bank Consolidation: Is There Cause for Concern?” Working Paper, Federal Reserve Bank of New York (1996).Google Scholar
Strahan, P. E., and Weston, J. P.. “Small Business Lending and the Changing Structure of the Banking Industry.” Journal of Banking and Finance, 22 (1998), 821–845.CrossRefGoogle Scholar
Whalen, G. “Out-of-State Holding Company Affiliation and Small Business Lending.” Working Paper 95–4, Economic and Policy Analysis, Office of the Comptroller of the Currency (1995).Google Scholar
Whiteman, L. “Small Banks Say One-on-One Beats Credit Scoring Models.” American Banker, (10 8, 1998), 13.Google Scholar
Williamson, O. E. “Hierarchical Control and Optimum Firm Size.” Journal of Political Economy, 75 (1967), 123–138.CrossRefGoogle Scholar