This note examines the share of small business lending activity by mid-sized and larger banks across metro areas. These banks play a vital role in local communities, especially as providers of credit to small businesses. However, they are particularly vulnerable to costs imposed by regulation, as they already face considerably higher regulatory burdens compared to community banks and nonbanks.
The analysis shows the important contribution of these banks to small business lending, a role that cannot easily be replicated, while also highlighting how the needs of the nation’s small businesses are being served by banks of all sizes. Mid-sized and larger banks combined account for more than half of small business loans originated in many of the 50 largest metropolitan areas, based on government data.[1] We also find that small business loans from different size categories of banks tend to be regionally concentrated. For instance, larger banks predominate in many cities in the Northeast and North Central states, where their share of small business lending activity is often as high as 40 to 50 percent. In addition, the analysis indicates that the small business lending activity of mid-sized and larger banks tends to be more broadly distributed across counties compared to their deposit holdings.
The recent failures of Silicon Valley Bank, Signature Bank and First Republic have prompted the federal banking agencies to move toward reversing the tailoring of enhanced prudential standards based on risk and complexity for banks with more than $100 billion in total assets.[2] Additionally, the heightened regulation of larger banks will ultimately affect many mid-sized banks as they grow organically or through mergers and approach this size threshold. Given mid-sized and larger banks’ crucial role in small business lending, and in supporting local communities more generally, regulators should proceed with caution and avoid imposing significant additional regulatory burdens on these banks. More stringent capital, liquidity or other regulatory requirements could lead to pulling back in small business lending because of higher costs. Any new regulatory requirements would be particularly misguided to the extent that they are unrelated to interest rate risk and excessive deposit concentrations from some sectors, the causes of the recent bank failures.
Data Sources
Our analysis distinguishes four size categories of banks: the top four largest banks, each of which has more than a trillion dollars in assets (JPMorgan, Wells Fargo, Citibank and Bank of America), community banks smaller than $10 billion in assets, and two categories in-between those groups.[3] The latter consists of large banks outside of the top four, having at least $100 billion in assets (for brevity, to be referred to as larger banks), and mid-sized banks (between $10 and $100 billion in assets) that are not quite as small and locally focused as community banks.
We rely primarily on the Federal Financial Institutions Examination Council’s public CRA database to examine small business loan origination volume (dollars) by bank size segment and geographic unit (metropolitan statistical areas and micropolitan areas). We use the 2021 CRA data from the FFIEC, the most recent available. For banks with less than approximately $1.3 billion in assets as of 2021, submission of small business CRA data was voluntary. Therefore, the community bank segment mostly comprises banks with $1.3 to $10 billion in assets.[4]
For the purposes of CRA reporting, small business loans are defined as those whose original amounts were $1 million or less and that were reported on the institution’s Call Report as either “Loans secured by nonfarm or nonresidential real estate” or “Commercial and industrial loans.” Thus, the public CRA database provides information on small business loans up to $1 million in size. These data provide the total amount of these loans originated by each reporting institution by loan size segment ($250,000 to < $1,000,000; $100,000 to < $250,000, and < $100,000) and geographic unit (state and county). Total small business lending of each reporting institution within each geographic unit is calculated as the sum across the three loan size segments.
Institutions are sorted into the four, previously noted size categories based on 2021 total assets. The 2021 CRA sample contains 379 community banks, defined as those with less than $10 billion in total assets. It contains 102 mid-sized banks, which are at least $10 billion but no larger than $100 billion. There are 24 banks larger than $100 billion in total assets excluding the top four largest banks, which comprise the larger bank category.[5] A list of the institutions in the larger bank category is provided in the Appendix.
The remaining category consists of the top four largest banks. Lastly, we calculate total small business loan originations and total deposits by institution size category for each metropolitan and micropolitan area and the corresponding small business lending and deposit shares by size category and geographic area.
For a part of our analysis, we also use the June 2021 Summary of Deposits dataset from the FDIC, which provides total deposits of each institution by state and county. Specifically, we rely on a data set from S&P Global Market Intelligence, which supplements the FDIC Summary of Deposits data with additional information, including each institution’s total assets. We apply the S&P-provided mapping of state and county to core-based statistical areas, encompassing both metropolitan statistical areas (MSAs) and smaller, non-urban micropolitan areas. We also apply cleaning and filtering steps to the deposit data as described in the technical appendix below. We use the data to examine banks’ small business loan originations across geographic areas relative to where they are gathering deposits.[6]
Market Share of Mid-sized and Larger Banks in Metropolitan Areas
An examination of the role of mid-sized and larger banks in individual metropolitan areas indicates that, in numerous major cities, both mid-sized and larger banks play crucial roles in financing small businesses. Table 1 shows the proportion of small business loan originations provided by mid-sized and larger banks in each of the top 25 MSAs. In 17 of these MSAs, the share of small business loans originated by mid-sized and larger banks exceeds 50 percent.
Table 1
Table 2 provides the same information for the next 25 largest MSAs. Mid-sized and larger banks’ presence tends to be even larger in these more modest-sized cities. For instance, the combined market share of mid-sized and larger banks’ small business loans exceeds 50 percent in all but three of these cities, which compares to all but eight of the 25 largest metropolitan areas.
Table 2
In fact, in aggregate, nearly 60 percent of the U.S. population resides in metro areas where the combined share of small business loans originated by mid-sized and larger banks exceeds 50 percent.
Mapping analysis
For visualization of the small business lending data, we rely primarily on a set of heat maps, in which the color shading of a county indicates the share of the area’s small business loans originated (or deposits held) by banks belonging to a specified size category.[7] A full set of descriptive maps, along with an interactive tool for toggling between maps to facilitate pairwise comparisons, can be found online here. In this section, we highlight key takeaways from this geographic analysis.
Map 1 shows the varying market presence of larger banks across counties within metropolitan areas. The map utilizes color shadings, ranging from deep orange (representing less than 10 percent of small business loan originations) to light orange and light purple (corresponding to medium shares of 20 to 30 percent), and finally to dark purple (representing shares of 40 percent or more). Thus, as evident from Map 1, a key takeaway is that larger banks play a dominant role in originating small business loans in many metropolitan areas located in the Northeast, North Central states and Florida.
Map 1: Larger Banks Share of Small Business Loan Organizations
Source: Small Business Loans by County – Originations — FFIEC CRA Disclosure Table 1-1 (2021)
Map 2 provides a similar representation for the cohort of mid-sized banks. In this case, the key takeaway is that mid-sized banks are the preeminent source of small business loans in many metropolitan areas located in the Southeast and South Central U.S. and in some in the Northwest. In turn, Map 3 demonstrates that community banks predominate in many metropolitan areas located throughout the Midwestern states.
Map 2: Mid-Sized Banks’ Share of Small Business Loan Organizations
Source: Small Business Loans by County – Originations — FFIEC CRA Disclosure Table 1-1 (2021)
Map 3: Community Banks’ Share of Small Business Loan Originations
Source: Small Business Loans by County – Originations — FFIEC CRA Disclosure Table 1-1 (2021)
Deposit Holdings in Relation to Small Business Loan Originations
An important economic role of banks operating in multiple localities is to efficiently allocate credit in response to local loan demand, which often reflects local economic growth opportunities. Therefore, according to theory, while a bank’s deposits tend to concentrate in areas with elevated household wealth and significant institutional deposits, small business lending is expected to be more widely and uniformly distributed across local areas.
Moreover, some banks specialize in lending to particular categories of small businesses. These banks may serve businesses located even further away from where they collect the bulk of their deposits. As a result, this would also contribute to loans being more widely and uniformly distributed compared to deposits.
In light of these possibilities, it may be of interest to examine the geographic footprint of banks’ small business lending relative to their deposit holdings. Maps 4 (small business loans) and 5 (deposits) provide this comparison for larger banks across metropolitan and micropolitan counties, after excluding from the CRA data those banks that do not have full-service branches, for which no information is available on where their deposit customers are located.[8]
Map 4: Larger Banks’ Share of Small Business Loan Originations*
Source: Small Business Loans by County – Originations — FFIEC CRA Disclosure Table 1-1 (2021)
Map 5: Larger Banks’ Share of Deposits*
Source: S&P Capital IQ Pro – Branch: Tape Deposits (2021)
We observe that some counties, depicted in darker shades of purple and orange in Map 5 to represent high and low deposit concentrations, appear as lighter shades of purple and orange in Map 4. This shift indicates that, in contrast to deposit holdings, the market presence of large banks in small business lending is more widely and uniformly distributed. Similar patterns are observed for the mid-sized bank segment, as well as the top four banks. Thus, this visual comparison indicates that small business lending is, as expected, more widely and uniformly distributed.
This visual evidence can be further substantiated by comparing the relative distribution of larger banks’ small business loan shares and their deposit shares within MSA Metropolitan and Micropolitan areas.[9] Based on this analysis, we find that larger banks exhibit a high concentration of small business loans (more than 40 percent share) in just 10 percent of the counties. They also have a moderate share (between 5 and 40 percent) in 85 percent of the counties and a tiny share (less than 5 percent) in the remaining 5 percent of the counties. In contrast, when it comes to deposits, large banks show a high concentration (greater than 40 percent deposit share) in a quarter of the counties, while they have a moderate deposit share (between 5 and 40 percent) in only about half of the counties. The mid-sized segment and the top four banks show qualitatively similar patterns when examined this way.
Conclusion
Mid-sized and larger banks play a vital role providing credit to small businesses in many local areas. This remains true even in the face of tough competition from the nation’s four largest banks, which benefit from economies of scale that help them bear their very large regulatory costs, as well as from community banks and nonbank institutions that face comparatively much lower regulatory burdens and related cost savings.
This note has highlighted how the role of mid-sized and larger banks is reflected in their shares of small business loan originations across local areas. Given that pivotal role, and their broader support to local communities, it is advisable for regulators and policymakers to exercise caution and refrain from imposing excessive additional regulatory burdens on these banks that could impede their ability to continue to serve this vital small business lending role.
[1] Data are submitted to the federal bank regulatory agencies by depository institutions in compliance with the Community Reinvestment Act (CRA). The data may not reflect lending by very small banks (those with less than about $1.3 billion in assets as of 2021) because reporting for those banks is voluntary.
[2] For instance, in recent speeches, Federal Reserve Vice Chair for Supervision Barr and FDIC Chairman Gruenberg indicated that the forthcoming “Basel III Endgame” changes to risk-based capital requirements should be applied consistently to all banks with total assets of $100 billion or more.
[3] There is a wide gap in size between the largest institution outside the top four, which is U.S. Bank with just above $580 billion in assets, and the smallest in the top four, which is Citibank, which has more than $1 trillion in assets.
[4] Only banks with total assets exceeding $1.322 billion as of Dec. 31 in both 2020 and 2019 were required to report small business loans in 2021. Thresholds on bank assets for reporting requirements are subject to changes annually by the FFIEC.
[5] The upper bound of the larger bank size category is about $600 billion. The top four largest banks all exceed $1 trillion in total assets. We exclude from the data and analysis the following banks that are not full-service commercial or retail banks but specialize in wealth management, wholesale banking or investment banking activities: Goldman Sachs Bank, USA, The Bank of New York Mellon, State Street Bank and Trust Company, Morgan Stanley Bank, N.A., The Northern Trust Company, Morgan Stanley Private Bank, N.A., Raymond James Bank and Stifel Bank. These exclusions ultimately resulted in immaterial effects on our analysis.
[6] After fully preparing and cleaning the datasets, we were left with branch-level deposit data in 2,763 counties (1,751 of which are classified as being within MSA Metropolitan or Micropolitan areas), whereas the small business loan dataset contained observations from 3,141 counties (1,830 of which are classified as being within MSA Metropolitan or Micropolitan areas).
[7] These are developed using the Choropleth mapping tool within the Python package Plotly Express.
[8] Further, community banks that are not present in the small business loan dataset are excluded from the deposit data for this analysis. Thus, Maps 4 and 5, respectively, are comprised of deposits held by and small business loans originated from banks that were present within both datasets, ensuring consistency in their comparison. These changes to the maps are specified by the asterisk at the end of their title.
[9] These distributions were calculated after removing banks without full-service branches from the CRA dataset and removing community banks not present in the CRA dataset from the deposit data to ensure consistency between the datasets.
Appendix: Cleaning/Methodology
We applied the same filtering rules to the FDIC Summary of Deposits data as used in previous BPI research on deposit concentration in urban banking markets. The following steps were taken in accordance with the prior methodology:
- In addition to the institutions listed in footnote 3, we exclude the following institutions which likewise are not full service commercial or retail banks (and are not present in the small business data): Stifel Trust Co., Delaware NA and Ameriprise Bank, FSB.
- Branches missing deposits were dropped.
- Only branches with 11 or 12 in Bank Branch Service Key were kept (these are full-service branches).
- Thrifts and savings banks were removed.
- 9*99th Percentile Cap: Within each county, the 99th percentile of branch deposits was calculated. Any branch with deposits above 9*99th percentile within that county were reduced down to the value of 9*99th percentile.
