Bank size, lending paradigms, and usage of Farm Service Agency's guaranteed loan programs
- 29 April 2014
- journal article
- Published by Emerald in Agricultural Finance Review
- Vol. 74 (1), 133-152
- https://doi.org/10.1108/afr-01-2013-0002
Abstract
Purpose – An established paradigm in small business lending is segmented by bank size with large banks more likely to lend to large informationally transparent firms while small banks are more likely to lend to small informationally opaque firms. In light of banking consolidation, this market segmentation can have implications for credit availability. Federal loan guarantees, such as those provided by USDA's Farm Service Agency (FSA) may reduce the risks of lending to informationally opaque firms thereby mitigating the impacts of the bank size lending paradigm. This paper aims to discuss these issues. Design/methodology/approach – This analysis utilized a binomial logit procedure to determine if there was any empirical evidence that smaller community banks served a unique clientele of farmers when making FSA-guaranteed loans. The analysis relied on a unique data set which incorporated detailed data on farm businesses receiving FSA-guaranteed loans, loan characteristics, as well as information about the originating bank and characteristics of the local credit markets. Findings – Results were consistent with the bank size lending paradigm with smaller banks being less likely to engage in fixed-asset lending, and more likely to serve a riskier and less established clientele when making guaranteed loans. Research limitations/implications – Data limitations did not permit detailed analysis of banks larger than $250 million in total assets nor for consideration of non-bank lenders. An expansion by these lender groups into serving more informationally opaque borrowers could mitigate any adverse impacts arising from fewer small community banks. Practical implications – The results suggested that Federal guarantees do not completely eliminate the relative informational advantages of large and small size banks. And, continued bank consolidation, such that there are fewer small community banks, could result in less credit availability among smaller, less creditworthy farm businesses. Social implications – While FSA guarantees may not enhance a large banks propensity to serve informationally opaque farm borrowers, they may enhance the ability of smaller community banks to serve groups specifically targeted through FSA lending programs; the provision of credit to family farmers who, despite being creditworthy, are unable to obtain credit at reasonable rates and terms. Originality/value – The analysis examines relationship between bank size and the use of FSA guarantees using a unique data set which incorporated information on FSA-guaranteed loans, farm financial characteristics, along with characteristics of commercial banks which participated in the FSA-guarantee program.Keywords
This publication has 27 references indexed in Scilit:
- A triple hurdle model of US commercial bank use of guaranteed operating loans and interest assistanceAgricultural Finance Review, 2011
- Bank size, lending technologies, and small business financeJournal of Banking & Finance, 2011
- Small Banks, Small Business, and Relationships: An Empirical Study of Lending to Small FarmsJournal of Financial Services Research, 2004
- The Dynamics of Market Entry: The Effects of Mergers and Acquisitions on Entry in the Banking IndustryThe Journal of Business, 2004
- The Economic Effects of Technological Progress: Evidence from the Banking IndustryJournal of Money, Credit and Banking, 2003
- Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational StructureFinance and Economics Discussion Series, 2001
- The consolidation of the financial services industry: Causes, consequences, and implications for the futureJournal of Banking & Finance, 1999
- The economics of small business finance: The roles of private equity and debt markets in the financial growth cycleJournal of Banking & Finance, 1998
- The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's BeenBrookings Papers on Economic Activity, 1995
- Relationship Lending and Lines of Credit in Small Firm FinanceThe Journal of Business, 1995