Bank branching deregulation harmed small businesses: FDIC paper

Community banks and small businesses were affected disproportionately by U.S. branching deregulation during the 1990s, according to a new research paper released by the FDIC’s Center for Financial Research.

Details: The working paper from Ohio State University’s John Lynch says as larger out-of-state banks entered local markets within deregulated states:

• Branches of existing local banks declined.

• Overall lending to small businesses declined by 5.4% and remained lower for several years.

• The decline in credit supply eventually led to a decrease in the number of small businesses.

Relationship Lending: According to Lynch, the results demonstrate the critical dependence of small businesses on community bank relationship lending and show how temporary negative shocks to credit supply can have persistent adverse effects on businesses.

ICBA Advocacy: With community banks accounting for more than 60% of the nation’s small-business lending, ICBA advocates numerous policies to mitigate banking consolidation, including:

• Opposing credit union acquisitions of community banks.

• Supporting tiered regulations that recognize community banks’ smaller size and lower risk profile.

• Advocating regulatory relief to promote de novo bank formation.

• Curbing or ending advantages enjoyed by too-big-to-fail institutions.