from the Chicago Fed
A growing body of research examines how the financial crisis and new regulations have resulted in a consistent decline in small business lending (SBL) by community banks. Beginning in the 1990s, large banks began to increase their market share at the expense of community banks. Ten years or more before the financial crisis, community banks offering standard commercial term loans began to lose their place as the first choice for small businesses seeking credit.
The financial crisis accelerated these trends, setting the stage for a new post-crisis landscape in credit markets for small firms. In this article, we use Federal Reserve data to demonstrate that before the financial crisis, small businesses were increasingly using real estate as collateral for loans. During the crisis, credit available from community banks contracted. Subsequently, as the economy and housing markets began to recover, large banks leveraged technology to compete for smaller commercial borrowers as they searched for lending opportunities in a low-interest-rate and low-return banking environment.
The financial crisis accelerated these trends, setting the stage for a new post-crisis landscape in credit markets for small firms. In this article, we use Federal Reserve data to demonstrate that before the financial crisis, small businesses were increasingly using real estate as collateral for loans. During the crisis, credit available from community banks contracted. Subsequently, as the economy and housing markets began to recover, large banks leveraged technology to compete for smaller commercial borrowers as they searched for lending opportunities in a low-interest-rate and low-return banking environment.
We also examine the rise of alternative and nonbank lenders over the past several years. Most recently, nonbank and alternative lenders have begun to compete with banks by introducing sophisticated technologies and new underwriting methods. These lenders typically issue small business loans electronicaly, with minimal processing time, across a range of sizes, terms, and borrower risk profiles. In a new development, nonbank lenders – including payment processors such as PayPal and Square – have begun to harness databases of borrower sales history collected during the processing of payments to offer cash-flow loans and other credit products.
In the post-crisis environment, evidence suggests that community banks are facing growing competition from both large banks and nonbank lenders. The latter are new entrants and are subject to fewer supervisory requirements. But evidence suggests that community banks may also be able to exploit some unique opportunities as the SBL sector continues to evolve. For starters, there is evidence that demand for credit is growing. We also examine the emerging examples of banks partnering with alternative lenders to fund qualifying loans originated through online platforms.
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Source: http://app.frbcommunications.org/e/er?s=1064 &lid=4215 &elqTrackId=32efc02feeb34db28ad241c380a176f3 &elq=1f1ff26b7dee48eca2076d40a773b1d1 &elqaid=10836 &elqat=1