Small Business Lending Survey 5

SECTION 1. 

Introduction

1 On the need for access to credit, see Titan Alon et al., “Older and Slower: The Startup Deficit’s Lasting Effects on Aggregate 

Productivity Growth,” Journal of Monetary Economics 93 (2018): 68–85, https://doi.org/10.1016/j.jmoneco.2017.10.004; and Thorsten Beck, Asli Demirgüç-Kunt, and Vojislav Maksimovic, “Financial and Legal Constraints to Growth: Does Firm Size Matter?” 

Journal of Finance 60, no.1 (2005): 137–77. On the role of banks, see Federal Reserve System, “Report on Employer Firms,” Small 

Business Credit Survey, April 2017. https://www.newyorkfed.org/medialibrary/media/smallbusiness/2016/SBCS-Report-EmployerFirms-2016.pdf; and Federal Reserve Bank of Cleveland. 2016 Small Business Credit Survey Report on Microbusinesses: 

Nonemployer and Small Employer Firms. November 2017. https://clevelandfed.org/global%20search?q=2016+Small+Business+-

Survey%3A+Report+on+Microbusinesses%3A+Nonemployer+and+Small+Employer+Firms.+Published+November+2017.+Federal+Reserve+Bank+of+Cleveland. 

2 On the advantages of banks relative to other external credit options, see Gregory Udell, “What’s in a Relationship? The Case of 

Commercial Lending,” Business Horizons 51 (2008): 93–10.

3 On the importance of small businesses to the U.S. economy, see U.S. Small Business Administration, Office of Advocacy, Frequently Asked Question (2017), https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2017-WEB.pdf. 

4 For a full description of the structural changes in the industry, see Federal Deposit Insurance Corporation, FDIC Community 

Banking Study, December 2012, https://www.fdic.gov/regulations/resources/cbi/report/cbi-full.pdf; and Eric C. Breitenstein 

and Nathan Hinton, “Community Bank Mergers since the Financial Crisis: How Acquired Community Banks Compared with Their 

Peers,” FDIC Quarterly 11, no. 4 (2017): 41–52, https://www.fdic.gov/bank/analytical/quarterly/2017-vol11-4/fdic-v11n4-3q2017-

article2.pdf.

5 The Call Report measure is the sum (reported to regulators) of outstanding small commercial and industrial loans, small commercial real estate loans, and small agricultural and farmland loans. See the box at the beginning of Section 2 for a discussion of the 

small business lending captured by regulatory Call Reports. 

The survival and growth of small businesses depends 

on access to credit, and banks are the most common 

source of external credit for small firms.1 Banks 

are able to provide this degree of financing because 

they have a special ability to identify creditworthy 

small businesses that often lack verifiable evidence 

of their quality.2 Yet, despite the importance of 

banks to small businesses and the importance of 

small businesses to the larger economy, very little 

comprehensive information is available about small 

business lending by banks.3

 In particular, evidence 

is scarce about how banks define small business 

lending, what approaches they take to meet the 

needs of these customers, and whether small banks 

and large banks approach small business lending in 

significantly different ways. 

The need for such information is important given 

the trends in the banking industry since the Great 

Recession. One such trend is consolidation: between 

2008 and 2017 the number of small banks in the 

country dropped by nearly a third and small-bank 

assets dropped by more than 14 percent, whereas large 

banks increased their assets by 13 percent (in this 

report, small banks are defined as those with under 

$10 billion in assets, and large banks as those with 

at least $10 billion in assets).4 Even so, at the end of 

2017 small banks, though holding only 17 percent of 

banking assets, held nearly 53 percent of small loans 

to businesses (according to the Call Report measure 

for small business lending).5 Another trend is the 

decline in the number of bank branches. In 2017 there 

were nearly 10 percent fewer branches in operation—

for all sizes of banks—than there had been in 2008. 

The critical question, then, is how the continuation 

of these trends is likely to affect the availability 

of credit to small businesses. The answer to that 

question requires a many-faceted answer to a 

different question: how do banks manage their small 

business lending, and in particular do small banks 

differ from large banks and are any such differences 

likely to affect small businesses? 

The established understanding of small business 

lending is that small and large banks do differ in 

the practices they use, the geographic areas they 

serve, and the types of information on which they 
6 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 1

base their decisions (see the box for detail on these 

differences). One implication is that the continued 

decline of small banks could have significant adverse 

effects on access to credit by these banks’ small 

business customers even if large banks continued to 

operate in the affected geographic area. This concern 

is most acute for firms that have little quantifiable 

evidence of their creditworthiness—most notably, 

start-ups. Although some evidence exists that is 

consistent with the established view of differences 

between small and large banks, no nationally 

representative survey has asked banks of all sizes to 

describe how they conduct small business lending, 

making it difficult to understand the possible 

implications of these practices for small businesses’ 

access to credit in the future.

To fill this knowledge gap, the Federal Deposit 

Insurance Corporation recently conducted the 

Small Business Lending Survey (SBLS) to collect 

RELATIONSHIP LENDING AND TRANSACTIONAL LENDING

The consensus explanation for banks’ centrality 

to small business finance is that banks have a 

unique ability to generate information that allows 

them to identify the high-quality small firm and, 

by extension, the profitable small business loan.a

Although all banks are thought to use a variety of 

methods to identify high-quality small businesses, 

small and large banks are widely considered to 

hold distinct advantages in how they generate 

information. As a result, small and large banks are 

expected to manage their small business lending 

programs differently. 

Specifically, small banks are regarded as having 

a comparative advantage in gathering and using 

“soft” information—knowledge of both the local 

community and the small businesses within it—

which the bank has accumulated over multiple 

interactions, and which is hard to quantify or 

transmit. Small banks are typically located within 

the communities they serve, which therefore 

lowers the transaction costs of engaging with and 

monitoring the firm or of gathering knowledge of 

the local market. Further, small banks are usually 

closely held organizations with few managerial 

layers between bank owners and loan officers, so 

that the loan officer may be more motivated to 

gather and use soft information when deciding 

whether to grant a business loan.b Small banks 

are therefore considered more flexible and able to 

engage with small businesses on a case-by-case 

basis. It is for these reasons that small banks as a 

group are believed to specialize their commercial 

and industrial lending to small businesses and are 

typically called relationship lenders. 

Large banks are regarded as taking advantage of 

economies of scale to gather and use large amounts 

of quantifiable, or “hard,” information about 

the borrower. This reliance on hard information 

requires that bank management specify the types 

of data used as well as the metrics for determining 

small business quality, usually well before any 

business applies for a loan. Further, since the 

information used by large banks is quantifiable, 

it can be submitted and shared electronically, 

which may reduce the need for the large bank 

decisionmakers to be in close proximity to the 

small business. This structure facilitates a highvolume small business lending model, and is often 

referred to as transactional lending.

a Udell, “What’s in a Relationship?”

b Allen N. Berger and Gregory F. Udell, “Small Business Credit Availability and Relationship Lending: The Importance of 

Bank Organisational Structure,” Economic Journal 112, no. 477 (2002): 32–53; and Jeremy C. Stein, “Information Production and Capital Allocation: Decentralized versus Hierarchical Firms.” Journal of Finance 57, no. 5 (2002): 1891–921, https://

doi.org/10.1111/0022-1082.00483.
 Small Business Lending Survey 7

Section 1

high-quality data on the small business lending 

practices of a large, nationally representative sample 

of U.S. banks. The survey had a sample response 

rate of 60 percent, with approximately 1,200 banks, 

or more than one-sixth of all banks in the country, 

responding. The answers given to the questions 

have been weighted to reflect the whole population 

of U.S. banks. There are currently few other surveys 

of small business lending that survey banks, and 

these other surveys include convenience samples 

of only small banks, which prevents comparison 

between different-sized banks; these other surveys 

also cover fewer topics.6 The SBLS is the only survey 

able to provide nationally representative findings 

that reflect a broad view of the practices of the entire 

industry, including both small and large banks.

The survey instrument was developed in 

consultation with experts at the U.S. Census Bureau 

and benefited from suggestions by more than 40 

banks of all sizes across the United States; these 

banks agreed to provide feedback on draft versions 

of the survey in one-on-one interviews throughout 

2015.7 The survey, which was conducted between 

June 2016 and January 2017, captured information 

about banks’ experiences in the calendar year 2015.

6 See Federal Reserve System and Conference of State Bank Supervisors, Community Banking Research and Policy Conference, October 4–5, 2017, Community Banking in the 21st Century 2017, https://www.communitybanking.org/~/media/files/

cb21pub_2017_book_web.pdf; and Jeff Bajek, “RMA Survey: Trends in Small Business Lending at Community Banks,” RMA 

Journal, March 2017, https://www.rmahq.org/ProductDetail.aspx?productid=491302131. Both publications report on surveys 

that use convenience sampling rather than random sampling. An exception is the Federal Reserve Bank of Kansas City’s newly 

launched KCFed Small Business Lending Survey, April 2, 2018, https://www.kansascityfed.org/~/media/files/publicat/research/

indicatorsdata/smallbusiness/2018/1stquarter/smallbusinesslendingsurvey04-02-18.pdf?la=en, which uses a nationally 

representative sample that includes large banks but has a narrower focus on the terms of lending offered by banks to small 

businesses. There are also current surveys of small business owners about their credit needs and experiences, which use either 

convenience samples or focus on a small set of firms. For examples of a small business owner surveys, see Federal Reserve 

System, “Report on Employer Firms,” Small Business Credit Survey, April 2017, https://www.newyorkfed.org/medialibrary/

media/smallbusiness/2016/SBCS-Report-EmployerFirms-2016.pdf or DesRoches, David and Potter, Frank and Santos, Betsy 

and Sengmavong, Ae and Zheng, Yuhong, “Kauffman Firm Survey (KFS) Seventh Follow Up Methodology Report,” June 28, 2013, 

https://ssrn.com/abstract=2286725. 

7 The survey development phase involved three rounds of interviews with institutions in both rural and urban areas and in ten 

states. See Appendix A for details on sampling methodology, survey development, and survey validation; see Appendix B for a 

discussion of the extrapolation methodology used to generate estimates, presented in Section 2, of small business lending by 

banks that is understated in current regulatory reports; see Appendix C for the full survey instrument.

The survey questions covered the following subject 

areas:

§ Banks’ characterizations of their small business 

borrowers

§ The volume of C&I lending to small businesses 

that is not captured in current bank reporting to 

regulators

§ Banks’ market area and their competitive 

environment for small business lending

§ Competitive practices and advantages

§ Loan products offered and underwriting 

practices, including for loans to start-ups.

The answers given in the first two areas allow the 

survey to make a particularly significant contribution 

to the measurement of small business lending. As 

explained in Section 2 of this report, the standard 

loan-size measure for small business C&I lending 

does not fully correspond to banks’ own definitions 

of what is a small business and what is small business 

lending, and therefore the standard measure is unable 

to capture substantial portions of such lending. The 

survey has made it possible to quantify two missing 

portions. Thus, the findings from the survey provide 

policymakers, bankers, and academics a better 

understanding of aspects of small business lending by 

banks that is currently understated.
8 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 1

The answers given in the remaining areas all relate 

to the approaches that banks take toward small 

business lending, and provide direct evidence on 

the differences between small and large banks. 

Sections 3, 4, and 5, each in its separate subject 

area, provide evidence in support of the established 

understanding, but they also show that, in practice, 

the differences between the approaches taken 

by the two sizes of banks involve many nuances. 

Although small and large banks do emphasize 

distinct aspects of small business lending, a core 

set of practices centering on locally-based personal 

interactions characterizes much of small business 

lending regardless of bank size. 

Sections 3, 4, and 5 report the survey findings 

in detail, by bank size, with Section 3 focusing 

on the environment for banks (market areas and 

competitors), Section 4 looking both within and 

without (competitive practices and perceptions of 

advantages), and finally, Section 5 focusing on the 

bank itself (loan products offered and underwriting 

practices). Each of these sections specifies the 

topic to be addressed and its rationale, describes 

the survey findings, and concludes by briefly 

discussing implications for small businesses’ future 

access to credit.