1. Effects of Bank Consolidation on Small Business Lending By Gek Peng Yeo

2. Why this topic?  Small business represents half of the private sector economy  Small business – key driver of entrepreneurship and employment growth  Bank consolidation affects small business lending, and economy indirectly

3. Outline  Literature Studies on Bank Consolidation  Analysis Large Bank vs. Small Bank Static, Dynamic, and External Effects Economic and Business Strategy Analysis  Conclusion

4. Literature Studies  Strahan 96 – Small banks owned by large banking companies hold fewer small business loans  Peek, Rosegren 98 – Merger has no effect, in fact, mergers frequently raise the small business lending  Strahan 98 –Organizational diseconomies vs. Size-related diversification

5. Literature Studies  Berger 98 – Small business lending increases following small bank merger  Berger 98 – Static, dynamic, and external effects on bank consolidation  Berger 02- Transactions-based lending vs. Relationship lending  DeYoung 04 – Past, present, and future of community banks

6. Large Bank vs. Small Bank  Mid, small, and rural banks decreases  Large bank increases

7. Regression Analysis – Bank Size vs. Small Business Lending  Avg. Loan Size vs. Bank Size As bank size grows, average small business loan size grows R2 is low at 0.09, but all bank size parameters are statistically significant  SBL/TA vs. Size As bank size grows, SBL/TA reduces R2 is low at 0.04, but all bank size parameters are statistically significant More parameters needed, but that’s okay

8. Transactions-based Lending vs. Relationship Lending  Transactions-based Mostly used by large banks Based on ‘hard’ information Financial statement, asset, credit score  Relationship Mostly used by small banks Based on ‘soft’ information More importantly, info gathered over time: owner’s reputation, supplier, customer, community

9. Static, Dynamic, and External Effects  Static – when two banks merge, the merged bank should have the same portfolio of SBL as a similar size bank  Dynamic – based on bank’s goal and specialization, they may restructure and direct to SBL business  External – reaction from other banks and non banks based on merged banks decision

10. External Effects Analysis  1980 -96 – Non bank share increases  1987 -93 – Finance companies SBL loan grows faster than bank

11. Economic Analysis  Rate may increase if without external effects  Small business may find it harder to allocate loans Rate Quantity S1S2 D

12. Business Strategy Analysis  Net interest income inversely proportional with bank size  Service charges inversely proportional with bank size  1980 – 2001 - ROE for large banks increases, ROE for small banks drops  2001 - Highest Sharpe ratio at large community banks

13. Business Strategy Analysis

14. Strategic Group Positioning Information Cost Large Small Mid and Large Community

15. Conclusion  Main goal of recent mergers among small banks is to position themselves as large community banks  Large community banks will continue to supply small business lending as long demand continues  Ineffective small banks will exit banking industry  Relationship lending continues unless viable small business credit scoring fully adopted  Effects of bank merger on SBL supply and rate are more important locally

16. Thank You!! High Five!! Class almost over!!