Bank size, locality, SME lending and local economies

Abstract

This thesis contains both macro- and microeconomic analyses of banking organisational structure, Small and Medium Sized Enterprises (SMEs) lending and local economic development. The first examination is based on a bank-level analysis to investigate the impact of bank size on bank propensity to small and micro business lending. Secondly, I review the regional banking-growth literature and highlight the need for original investigations of the effects of local small business lending, as a measure of local banking development, on local economic development, emphasising the importance of distributional heterogeneity and spatial effects across regions within a one-country framework. Thirdly, I empirically investigate whether small and micro business lending, provided by small local banks, has an impact on the performance of local economies, taking into consideration the distributional heterogeneity among regions. Finally, I examine whether spatial spillover effects of local banks on local economies are significant.

Using an econometric approach and data on over 14,000 U.S banks of all sizes, from 1994 to 2013, the results indicate an inverse relationship between bank size and the propensity of banks to lend to small and micro businesses. The relationship is robust and survives a number of rigorous specification checks. The subsequent review of the literature of regional banking-growth studies reveals that previously employed econometric methodologies do not account for distributional heterogeneity and spatial spillover effects in the examination of the regional banking-growth relationship. I also offer the small business lending channel as a proxy measure for local banking development. Furthermore, the subsequent analyses of the local banking-growth nexus indicate a boosting impact of local banks on the local economies through the small business lending channel. Besides, such impact varies in accordance to the regions’ level of economic development and the magnitude of the spillovers of SME loans from one region to another.

Important policy implications can be drawn from my empirical findings. The inverse association of bank size with propensity to small business lending indicates that small banks are superior in SME lending through their form of relationship lending. Accordingly, small banks can be the optimal financial machinery to facilitate credit to and support the growth of SMEs. Moreover, the results emphasise the importance of small locally-operating banks to development of the local economies through small business lending, as well as confirm the existence of heterogeneous effects and significant spatial spillover effects of small local banks on the growth of the regions. The policy implication is that policy-makers need to ensure that localisation effects are sustained, because of the comparatively minimal cost required to minimize individual (in relation to aggregate) uncertainties and local stability can be relied upon to achieve global stability. Both can be done by supporting the creation and continued viability of small local banks. For this, a positive yield curve is required – which currently central banks in many countries are not delivering

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