Despite these shortcomings, the new data provide a good, comprehensive picture of which banks do small business lending. Given these aggregate figures, it is no surprise to find that small banks also tend to allocate more of their portfolio to small business lending. The ratio rises for the first three size groups, then steadily declines. One explanation of the tendency for small banks to devote a larger share of their funds to small business lending is that there are clear limits to the size of the loans a small bank can make. If loans are too big relative to the rest of the bank, the bank becomes undiversified and may suffer sudden, catastrophic losses.
Bigger banks can make large loans and still be diversified.
As a result, small loans may decline as a share of assets because other loans increase, not because small loans fall. Another possibility is that small banks concentrate on small loans because they cannot compete for larger loans. To some degree, smaller banks might tend to be cut out of the market for larger business loans because they are less able to offer certain other banking services that larger lenders can provide, such as foreign exchange transactions, acceptance financing, or interest rate swaps. Many business customers demonstrate a preference for dealing with a single bank, putting small banks at a disadvantage in competing for larger borrowers that need these other services. Smaller banks' heavier focus on small business lending could also be due to comparative advantage.