The relationship between bank size and the propensity to lend to small firms: New empirical evidence from a large sample

Achraf Mkhaiber and Richard Werner ()

Journal of International Money and Finance, 2021, vol. 110, issue C

Abstract: 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, and an even greater proportion in Germany and 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, 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 are robust and indicate an inverse relationship between bank size and the propensity of banks to lend to small businesses. We thus contribute towards settling 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 in the UK), in order to help overcome growth constraints on small and micro businesses.

Keywords: Bank lending; Bank size; Banking sector; Decentralised banking; SME finance; Small firm and micro business finance (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:110:y:2021:i:c:s0261560620302370

DOI: 10.1016/j.jimonfin.2020.102281

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