Small Business Lending: Challenges and Opportunities for Community Banks

53 Pages Posted: 22 Mar 2016

See all articles by Julapa Jagtiani

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Catharine Lemieux

Federal Reserve Bank of Chicago

Date Written: 2016-03-21

Abstract

The recent decline in small business lending (SBL) among U.S. community banks has spurred a growing debate about the future role of small banks in providing credit to U.S. small businesses. This paper adds to that discussion in three key ways. First, this research builds on existing evidence, suggesting that the decline in SBL by community banks is a trend that began at least a decade before the financial crisis. Second, the authors show that in the years preceding the crisis, small businesses increasingly turned to mortgage credit to fund their operations. Finally, this paper illustrates how community banks face an increasingly dynamic competitive landscape, including the entry of deep-pocketed alternative nonbank lenders using technology to find borrowers and to underwrite loans, often using unconventional lending practices. Although these lenders may pose a competitive threat to community banks, the authors explore emerging examples of partnerships and alliances among community banks and nonbank lenders.

Keywords: Small business lending, Online lending, Lending technology, Shadow banking, Community banks, Large and small banks

JEL Classification: G21, G23

Suggested Citation

Jagtiani, Julapa A. and Lemieux, Catharine, Small Business Lending: Challenges and Opportunities for Community Banks (2016-03-21). FRB of Philadelphia Working Paper No. 16-8, Available at SSRN: https://ssrn.com/abstract=2752863

Julapa A. Jagtiani (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Catharine Lemieux

Federal Reserve Bank of Chicago

230 South LaSalle Street
Chicago, IL 60604
United States

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