that some relatively transparent small business borrowers can be financed outside the bank, other, more opaque potential borrowers that previously had information and other problems too serious for even a bank loan will enter the bank intermediation process. put another way, the relationship lending process will fund small business borrowers with increasingly difficult information problems as the technology for resolving these problems improves. in my view, this should only increase the efficiency and the competitiveness of small business finance. for example, the improved ability of banks to lend to more opaque borrowers should provide some increased competition for the venture capitalists and angel financiers that were discussed at the conference yesterday. the value of gathering information through the relationship between banks and small businesses also bodes well for the survival of small community - based banks that tend to specialize in these relationships. most forecasts of the future of the u. s. banking industry predict that thousands of small banks will survive. i hasten to point out that these are not my personal forecasts. i stick to predicting interest rates, gdp growth, and inflation - - items over which i have more control and inside information - - and i leave the banking forecasts to others! but the forecast of thousands of small banks continuing to operate and do well makes sense to me. they have information advantages, knowhow, and local community orientations that are hard to duplicate in large organizations. the importance of relationship lending to small business also raises prudential concerns about bank risk taking. when a bank fails, the losses to society exceed the book values involved because of the loss of the value of the bank ’ s customer relationships. even if small business borrowers are able to find financing after their bank fails, it may be at a higher interest rate and with additional collateral requirements until the new bank has had a chance to learn about the borrower ’ s condition and prospects. when many banks fail during a crisis, this can create a credit crunch or significant reduction in the supply of credit to bank - dependent small business borrowers. for example, research on the great depression suggests that the loss of bank - borrower relationships in the 1930s may have deepened and prolonged the economic downturn. more recently, it appears that the weak capital positions of many banks in the late 1980s and early 1990s, not to mention the outright failure of over 1, 100 banks during this period, contributed importantly to the sharp slowdown in bank commercial lending during the early 1990s. while the ability of small businesses to

mr. meyer looks at the role of us banks in small business finance remarks by mr. laurence h. meyer, a member of the board of governors of the us federal reserve system, at the conference on small business finance held at the leonard n. stern school of business, berkley center for entrepreneurial studies and new york university salomon center in new york on 23 / 5 / 97. it is a pleasure to be here to meet with you at new york university for this conference on small business finance. it is clear from the conference program that there is an excellent mix of academics, government representatives, and practitioners here to study how small business is financed. indeed, i am glad to see so much attention being paid to this important topic. small business is a vital and energetic part of our economy that plays a key role in the generation of jobs, new ideas, and the encouragement of entrepreneurial activity. without doubt, a thriving small business sector contributes to the well - being of our nation. today, i would like to share with you some thoughts about the role of banks in supplying credit to small business. the part played by banks in small business finance is not a new topic for the federal reserve. in fact, for many years we have been devoting substantial resources to collecting and analyzing data on small business finance generally, and the credit supplied by banks in particular. we collect data from small businesses on how they obtain financing - - or in some cases fail to obtain financing - - using the national survey of small business finance and the survey of consumer finances. we also gather information directly on the small business credit extended by individual commercial banks. we have collected information on the contract terms of bank loans to both small and large businesses since 1977 through the survey of terms of bank lending to business. since 1993, the banking agencies have required all commercial banks to report their quantities of loans to businesses by size of loan on the june call reports. lastly, as part of revised community reinvestment act procedures, the banking agencies have just this year begun to collect data on small business loans by local geographic area. when these data become available, they should prove to be a rich source of new information. a number of economists have used the existing data in research that has helped us to better understand the potential effects on the supply of small business credit of public policies regarding bank mergers and acquisitions, financial modernization, and prudential supervision and regulation. for example, some have argued that the consolidation of the