Does Size Matter? The Effects of Bank Mergers on Small Firm Financing across the United States

In the 1950s Gurley and Shaw (1955) began emphasizing the role of intermediaries in the credit supply process. It is now well established that financial intermediaries have a fundamental role in determining the amount and distribution of credit to the economy. There is less agreement, unfortunately, about the precise way in which alternative structures of the banking industry manifest their influence on the economy. Recently, it has been shown that, by changing the behavior of lending institutions, monetary policy affects different groups of borrowers in different ways. In particular, Bernanke and Gertler (1995) have shown that, following a restrictive shock to monetary policy, the decrease in the amount of loans to small firms exceeds the decrease in the amount of loans to large firms. This is so because the increased riskiness of small firms during the periods of restrictive monetary policy causes banks to concentrate their loans on larger, more diversified firms. Since costs of direct financing are exceedingly large for small firms, they are unable to obtain credit directly, and their main form of outside financing remains the traditional banking industry. Thus, to the extent that banks are the main sources of loans for small firms, when banks change their behavior, small businesses face a decrease in the amount of loanable funds available to them and, as a result, a significant worsening of credit conditions