Cookie-Cutter versus Character: The Micro Structure of Small Business Lending by Large and Small Banks

Abstract

The recent consolidation in the banking system has focused attention on the difference in lending between large and small banks, since large banks lend proportionally less to small business. We use a newly available survey of small business finances conducted by the Federal Reserve System to analyze the micro-level differences between large banks and small banks in the loan approval process. We find that large banks (over $1 billion in assets) appear to employ standard criteria obtained from financial statements in the loan decision process, while small banks (less than $1 billion in assets) deviate from these criteria more and appear to rely on their impression of the character of the borrower to a larger extent. These "cookie-cutter" and "character" approaches are consistent with the incentives and environments facing large and small banks.