The relationship between bank size and the propensity to lend to small firms: New empirical evidence from a large sample
Small and medium-sized enterprises, in aggregate, are the biggest employer in most countries, accounting for about two thirds of all employment in the UK, more than 70% in Germany and about 80% in Japan. Small firms are largely dependent on bank credit for external funding. This paper examines the question whether there is a significant relationship between bank size and customer size and whether bigger or smaller banks are more likely to be helpful to small and very small businesses in terms of providing loans. Using data on over 14,000 active and inactive U.S banks of all sizes, from 1994 to 2013, thus utilising over 178,000 observations, we conduct hitherto the largest empirical examination of this question, applying a new and superior methodology that resolves prior controversies. The results indicate an inverse relationship between bank size and the propensity of banks to lend to small businesses. The relationship is robust and survives a number of rigorous specification checks. The result helps decide a long-standing debate about the influence of bank size on bank finance for small firms. Policy implications are discussed, such as the importance of a diverse and decentralised banking sector that includes a large number of small banks, such as exists in the US (but not other countries, such as the UK), in order to help overcome growth constraints on small and micro businesses.
The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link. Open access article.
Citation : Mkhaiber, A. and Werner, R.A. (2020) The relationship between bank size and the propensity to lend to small firms: New empirical evidence from a large sample. Journal of International Money and Finance, 102281.
ISSN : 0261-5606
Research Institute : Centre for Research in Accountability, Governance and Sustainability (CRAGS)
Peer Reviewed : Yes