Survey report: Small-biz lending varies among big, small banks; both focus on relationships

A survey conducted by the federal bank deposit insurer on banks’ small-business lending practices showed differences in how large and small banks – those under $10 billion in assets, and $10 billion and above – conduct such lending, but it found that both large and small institutions rely heavily on relationships.

Source: 2018 FDIC Small Business Lending Survey

The 2018 Small Business Lending Survey (SBLS), conducted by the Federal Deposit Insurance Corp. (FDIC), showed that the smaller banks were more likely to focus on relationship-based practices to conduct small-business lending, while the larger institutions were more likely to rely on transaction-based methods. “However, both small and large banks place importance on relationships with their small business borrowers, and small business lending by banks of all sizes is characterized by high-touch, staff-intensive interactions that are primarily at the local level,” the FDIC said in a release Monday.

“Small businesses comprise almost half of private-sector employment in the United States, and banks are the most common source of external credit for these businesses,” FDIC Chairman Jelena McWilliams said in a statement. “Despite holding only 13% of banking industry assets, our data shows that community banks hold 42% of small business loans. In light of ongoing consolidation in the banking industry, banks’ ability to meet the credit needs of this important sector is of vital interest to the FDIC.”

Topics in the survey included, but were not limited to, banks’ small business borrowers, market areas and competitive environments, competitive practices and advantages, and underwriting practices, including for loans to start-ups. Banks were also asked about their overall volume of small business lending to assess how well current reporting measures capture their actual lending to small businesses.

For example, a section on competition in the survey report says competition is based largely on local banks. The survey results showed credit unions and fintech (nonbank online lenders and marketplace lenders) were “emerging as competitors, but are not currently top competitors,” the FDIC said in the report.

The FDIC says very little comprehensive information is available about how small business lending is conducted by banks; it says this information is essential given the ongoing consolidation in the banking industry – which, in turn, could have “significant negative effects” for U.S. small businesses.

The SBLS collected information on banks’ entire volume of commercial and industrial (C&I) lending by firm size and by residential real estate collateral; FDIC said this allows the agency to provide direct evidence that small business lending by banks is currently understated. Survey findings, it said, showed that the best available proxy for small business C&I lending “substantially understates the amount of lending extended by banks to small businesses, especially by small banks.”

FDIC said that about 2,000 banks were selected at random to participate in the large-scale, nationally representative survey. Approximately 1,200 banks – more than one-sixth of all FDIC-insured institutions in the United States – ultimately responded, yielding a 60% survey response rate. The data was collected in 2016 and 2017.

2018 FDIC Small Business Lending Survey