Banking Deregulation Boosts Local Entrepreneurial Acticivity
Banking deregulation appears to facilitate entrepreneurial activity in local markets, a new working paper* published by the Harvard Business School suggests. As might be expected, the paper finds that banks with less centralized structures for making loan decisions are more responsive to market conditions and opportunities. “On the other hand, decentralized banks were also more likely than centralized banks to cherry pick the best firms, give smaller loans and charge higher interest rates in concentrated banking markets.”
This was especially true for companies in the service sector.
Greater access to “soft information” and an ability to respond to that information allows decentralized banks to pick up on changes in the local market place with greater agility than large competitors. It also, however, allows them to use that information to charge higher interest rates or issue loans with more favorable conditions when they see the opportunity to do so.
These findings highlight a ‘darker side’ to decentralized banks and suggest that the relative benefit of a decentralized bank structure for small business lending depends critically on the nature of the competitive environment in which banks are located.
The authors say their findings, which are based on loan-level date from Mexico, suggest that the uptick in entrepreneurial activity in many local markets following banking deregulation in the late 1970s in the US may “have occurred precisely because small banks were not able to exploit their monopoly powers as easily once they faced increased competition for business.”
*Bank Structures and the Terms of Lending to Small Businesses; by Rodrigo Canales, MIT; Ramana Nanda, HBS
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