Market valuations of smaller publicly-held banks are higher than they would otherwise be due to their investment in relationship lending, according to a study issued today by the Office of Advocacy of the U.S. Small Business Administration. The study examined the link between market valuation and small business lending for 817 publicly-held banking organizations during the period 1994 through 2005.
"This study shows that for smaller banks it is worth the time and effort to invest in relationship lending," said Dr. Chad Moutray, Chief Economist for the Office of Advocacy. "The market values the added profit that comes from personally knowing small business customers, and being able to offer them loans and services not obtainable from other banking organizations."
Many times small firms have little or no collateral and younger firms do not have a credit history on which to base banking decisions. These firms may be excluded from "transactional" financing decisions that require credit scoring and other analysis of hard data used to evaluate the credit worthiness of the business and its owner.
On the other hand, "relationship" lending relies on the formation of bank-firm relations, and requires an investment by the bank in costly information acquisition and processing as well as the monitoring of firm activities. Such investments result in somewhat higher fees and interest rates for the small business customer to offset the cost of these banking activities.
Written by Dr. Joe Peek with funding from the Office of Advocacy, The Value to Banks of Small Business Lending concludes, "small business lending is a profitable market niche for small publicly traded banking organizations. . . The evidence is consistent with these banks having a comparative advantage in originating and monitoring small business loans compared to larger banking organizations."
Dr. Peek will present his findings today to the Washington Area Finance Association Conference at George Mason University.
The Office of Advocacy, the "small business watchdog" of the federal government, examines the role and status of small business in the economy and independently represents the views of small business to federal agencies, Congress, and the President. It is the source for small business statistics presented in user-friendly formats, and it funds research into small business issues.
For more information and a complete copy of the study, visit the Office of Advocacy website at www.sba.gov/advo.
Washington - May 4, 2007
Release Number: 07-14 ADVO
Contact: John McDowell, (202) 205-6941,
john.mcdowell@sba.gov
Information courtesy of the Small Business Administration.
