Universal Banking and the Future of Small Business Lending

Abstract

We examine the contention that as banks become larger and more organizationally complex – i.e., more like universal banks – they may reduce the supply of credit to small business borrowers. This would be consistent with an effort to reduce Williamson-type managerial diseconomies in providing services for large and small borrowers jointly. We investigate the empirical association of loan price and quantity with bank size and complexity, using a data set with over 900,00 bank loans. The data support the proposition that larger, more complex banks may reduce the supply of small business lending, although other institutions may replace many of these loans.