Myth Versus Reality on Small Business Lending

Myth Versus Reality on Small Business Lending

We frequently hear it said that community banks make the majority of small business loans, and for this reason, regulatory reform for community banks is both necessary and sufficient to stimulate small business growth. The facts suggest that this conclusion is valid, but incomplete. Community banks do make a lot of small business loans, and regulatory relief for those banks would prompt economic growth. However, large banks also make a lot of small business loans, substantially more than or a bit less than small banks, depending on how you measure it, and regulatory relief for large banks should be just as important if not a priority.

Banks report on their Call Report forms the amount of various categories of small business loans on their balance sheet at the ends of each quarter. Defining “small business loans” as commercial real estate loans and commercial and industrial loans with original amounts of less than $1 million, and “community banks” as ones with less than $10 billion in assets, community banks hold 52 percent of commercial banks’ outstanding small business loans, with larger banks holding the remainder. The “largest banks”, defined as those in holding companies with at least $50 billion in assets, hold about one-third of small business loans.

Banks also report (in compliance with the Community Reinvestment Act) data on the dollar amount and number of small business loans they originate. Using these data, the largest banks originated 54 percent small business loans in 2015 by dollar amount and 86 percent by number.

Because the largest banks originated a larger share of small business loans than they had outstanding by dollar amount, and a larger share still by number, it appears the small business loans made by the largest banks had relatively shorter maturities and small size. These results likely reflect the considerable amount of credit card lending by the largest banks to small businesses.

Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of The Clearing House or its membership.