WASHINGTON–A new report from the FDIC offers some insights into how large and small banks conduct their business when it comes to making loans to small business, adding the decline in branches may negatively affect access to credit by those same borrowers.
The FDIC’s Small Business Lending Survey found that banks of different sizes approach small business lending differently, but that, overall, relationships are important for both small and large banks.
Small banks, defined in the report as those with assets of less than $10 billion, and are more likely to focus on relationship-based practices to conduct small business lending. Large banks, those with assets of $10 billion or more, are more likely to rely on transaction-based methods.
High Touch, Staff-Intensive Service
“However, both small and large banks place importance on relationships with their small business borrowers, and small business lending by banks of all sizes is characterized by high-touch, staff-intensive interactions that are primarily at the local level,” the FDIC said. “Given the current consolidation trend in U.S. banking, it is essential to understand the practices that banks use to meet the needs of small businesses, and how these practices differ between banks of different sizes. In particular, the continued decline in the number of small banks and of bank branches (for banks of all sizes) may have significant negative effects on U.S. small businesses.”
The Small Business Lending Survey is based on responses from approximately 1,200 banks that responded to the survey—over one-sixth
of all banks in the nation. The SBLS collected information on banks’ entire volume of commercial and industrial (C&I) lending by firm size and by residential real estate collateral, which the FDIC said enables it to provide direct evidence that small business lending by banks is currently understated.
The findings of the survey show that the best available proxy for small business C&I lending substantially understates the amount of lending extended by banks to small businesses, especially by small banks, the FDIC said.
The Findings
Among the findings, according to the FDIC:
- The best available measure of small business lending is a proxy based on loan size, but many loans made to small businesses are above the loan-size limit used ($1 million). For banks with between $1 billion and $10 billion in assets, over a fifth of their C&I lending above $1 million was made to businesses with under $1 million in revenue.
- The proxy also fails to capture small business lending secured by residential real estate. “Yet 6% of lending by small banks for commercial and industrial purposes was secured by 1- to 4-family residential properties.”
- In 2015, small business C&I lending in the U.S. banking industry was understated by at least 12% ($37 billion).
- Small business C&I lending by small banks was understated by at least 29%.
- Both small and large banks most frequently cite relationships and personal attention as their top competitive advantages.
- Large majorities of both small and large banks are typically willing to grant exceptions to their underwriting policies based on existing loan and depositor relationships, the FDIC said.
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Majorities of both small and large banks
use high-touch, staff-intensive practices to maintain and generate small business lending relationships, and customer referrals are a focus for both sizes of banks. - Small banks are more likely to focus on community involvement and personal attention, while large banks focus more on professional referrals and their own branch network.
- A large majority of small banks define their small business lending trade areas locally, as do a substantial share of large banks.
- Almost all banks accept applications at branches; both sizes, but especially large banks, also accept applications during staff visits and over telephone calls.
- Very few small or large banks accept small business loan applications online.
- Credit unions and fintech firms are emerging as competitors, but are not currently top competitors.
For the full report, go here.