No. 254

March 2005

SMALL BUSINESS

RESEARCH

SUMMARY

The Effects of Mergers and Acquisitions on Small Business

Lending by Large Banks

by Diana Hancock, Joe Peek, and James A. Wilcox; 

KeyPoint Consulting LLC, [48] pages. Emeryville, CA 94608

under contract no. SBA-HQ-02-Q-0024

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Substantial financial deregulation and financial innovation in recent years have changed banking. The

resulting consolidation of banking and improvements

in technology have had important effects on small

business lending, with large bank holding companies

(BHCs) playing a larger role in such lending.

In contrast to previous studies that focused on the

small business lending at smaller banks, the report

focuses on non-credit card lending at the 50 largest

bank holding companies. The largest BHCs have

come to represent ever larger shares of U.S. banking

assets. In addition, their rapid pace of acquisitions

and mergers seems likely to continue. These developments make it particularly important to better

understand the effects of bank growth and the changing organizational structure of the largest BHCs on

small business lending.

The study documents recent trends in small business lending at the largest BHCs. It then provides an

analysis of the effects of the recent consolidation in

the banking industry on small business lending. The

analysis makes key distinctions that are generally

missing from the literature and estimates of small

business lending. First, it distinguishes between (1)

originations and purchases of small business loans

and (2) the more typically used stocks of small business loans held on bank balance sheets. It then looks

to see whether views about the credit available to

small businesses might be influenced by the choice

of the measure of lending. Second, it distinguishes

between acquisitions of banks (and BHCs) and

mergers of banks (and BHCs). To date, little is

known about the effects on small business lending of

consolidation within a BHC (the combining of bank

charters through mergers), as opposed to the effects

of consolidation into a BHC (the change of ownership through acquisitions). By distinguishing mergers of within-BHC banks from bank acquisitions by

a BHC, the report estimates whether small business

lending is affected differently by shifts in the organizational structure of BHCs than by changes in the

ownership of banks. Third, it distinguishes between

the effects of internal and external growth of the

largest BHCs.

Overall Findings

The results suggest that, in general, larger BHCs tend

to do less small business lending. That masks some

important distinctions: small business lending can be

affected quite differently by the way in which a BHC

becomes larger and the extent to which the BHCs

consolidate their bank subsidiaries. The results hint

that banks that are acquired, but not placed under the

more direct control that accompanies a formal merger, may do about the same amount of small business

lending as prior to the acquisition. In contrast, the

merging of bank charters within the BHC seems

more likely to reduce small business lending.

Highlights

• Small business lending at a BHC tends to be

smaller (relative to its total business loans) the larger

the BHC is. This pattern holds regardless of whether
small business lending is measured by the change in

bank holdings or by the sum of originations plus purchases of small business loans.

• Small business lending declined significantly

across each of the various dependent variables and

loan sizes. Thus, both internal growth (as captured

by the acquisition-adjusted specification) and total

growth (which is the sum of internal growth plus

acquisition-based growth) tend to reduce small business lending for each loan size category. The similarity of the estimated coefficients based on acquisitionadjusted data to those based on actual data suggests

that internal growth has about the same effect on

small business lending as external growth.

• Given the size and extent of the internal and

external growth of a BHC, the more concentrated the

assets become in its larger banks, through either internal growth or through mergers of its bank subsidiaries,

the less small business lending the BHC does.

• In addition to the pure size effect, the organizational form of a BHC has important effects on small

business lending. When BHCs acquire and thus change

the ownership of banks—but do not merge them with

their other banks (or with each other)—small business lending is little affected. In contrast, as BHCs

merge bank subsidiaries and otherwise shift assets

into their larger banks, their small business lending

declines. Thus, the centralization, or increased concentration, of command and control of assets matters

more than a change in ownership of a bank.

Methodology

The authors use annual data for 1997 to 2002, which

incorporates data for small business lending during

the 2001 national recession and the 2002 recovery.

They use data for the 50 largest U.S. bank holding

companies, as measured by their domestic bank

assets as of mid-2002. They construct and analyze

both conventional and novel data for banks, aggregated to the bank holding company level, and for

their small business lending. When summing up

assets and lending of individual BHCs, they exclude

small banks, credit card banks, limited purpose

banks, wholesale banks, and some other institutions.

They use a number of sources for their data, including (1) the Consolidated Reports of Condition and

Income (call reports) for balance sheet and income

data for individual banks; (2) the Community

Reinvestment Act (CRA) reports for (gross) originations and purchases of business loans; (3) the Federal

Reserve Board’s National Information Center (NIC)

data for financial structure information; and, (4) the

Federal Reserve’s Survey of Terms of Bank Lending

(STBL) for information on loan characteristics.

The authors use both actual and acquisitionadjusted data for each BHC. Actual BHC data are

the sum of the data for the BHC’s bank subsidiaries

in a given year. Changes in these data reflect internal

growth, as opposed to growth via acquisition.

They adjusted most variables for the scale of total

business lending a BHC had been doing. In general,

they explained measures of flows of small business

lending with the overall size of a BHC (as measured

by its total bank assets), a measure of how much of

that size was attributable to acquisitions, and a measure of the degree to which a BHC’s total bank assets

were concentrated in a few large banks. 

This report was peer-reviewed consistent with

Advocacy’s data quality guidelines. More information on this process can be obtained by contacting

the director of economic research at

advocacy@sba.gov or (202) 205-6533.

Ordering Information

The full text of this report and summaries of other

studies performed under contract to the U.S. Small

Business Administration’s Office of Advocacy are

available at www.sba.gov/advo/research. Copies are

also available from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

(703) 487-4650, (703) 487-4639 (TDD)

www.ntis.gov

NTIS order number: PB2005-102199

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