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This report, “The Impact of Deregulation on Rural Commercial Credit Availability in Four New England States: Empirical Evidence and Policy Implications” by Deborah M. Markley, evaluates the effects of financial deregulation on the availability of commercial credit in rural areas, especially for small businesses. The study focuses on four New England states (Maine, Massachusetts, New Hampshire, and Vermont) which have a history of interstate banking and commercial lending by savings banks.
Key aspects of the study include:
- Definition of Deregulation: Broadly defined to include the expansion of large banks and bank holding companies across state lines, increased branching and acquisition of existing banks within a state, and expanded commercial lending powers for savings banks.
- Research Hypotheses: The study hypothesized that commercial credit availability would differ based on a bank’s institutional structure (independent vs. branch/BHC) and the structure of the rural banking market, and that management plays a key role in credit provision. It also assumed small businesses would be negatively affected by market changes due to deregulation, leading to more centralized credit decisions and reliance on standardized accounting.
- Methodology: The study evaluated both the supply and demand sides of rural capital markets through surveys of small businesses and financial institutions (commercial banks and savings banks).
- Small Business Survey: Collected information on credit needs, experiences, primary lenders, perceptions of changing markets, and firm characteristics. Out of 2081 usable surveys, 582 were completed (28% response rate). The respondents were primarily small, established firms in trade and service sectors.
- Financial Institution Surveys: Gathered data on lending practices, loan decision-making criteria, services provided, and attitudes towards small business lending and deregulation. Of 130 institutions, 114 completed interviews (88% response rate).
- Market Typology: Rural banking markets were classified into three types: dominated by independent banks, dominated by large in- or out-of-state institutions (affiliated banks), or a mix of both.
Key Findings:
- Small Business Credit Experience: Over 50% of start-up capital came from private sources, with commercial banks providing 27%-35%. Commercial banks were also important for loans during the first five years (44%-58%) and most recent five years (53%-65%). Younger and smaller firms generally had more difficulty obtaining traditional commercial credit, sometimes substituting home equity loans or public capital.
- Market Structure and Credit Availability: Greater credit constraints appeared in markets dominated by affiliated banks compared to independent banks. In mixed markets, credit availability was generally better than in affiliated-bank-dominated markets but still less than in independent markets.
- Reasons for Not Expanding: While credit limitations were mentioned more often in markets dominated by affiliated institutions, the most important constraint on business expansion, regardless of market type, was limited management capacity.
- Commercial Credit Needs: Short-term credit (especially unsecured) and long-term credit were cited as the most important needs. Equity capital was a less common need, likely due to the established nature of the surveyed firms.
- Business Services & Attitudes: A small percentage of firms used various business services offered by banks, and a large percentage were unaware of these services, indicating an information gap. Most businesses expressed positive perceptions of changes in local credit markets, suggesting favorable economic conditions might mask deregulation impacts.
- Banker Perspectives: Most bankers felt they could increase small business lending but faced constraints like inadequate deposit base (for independent banks) or poor business climate (for branch/holding company banks). Independent banks were more likely to refer businesses to other capital sources. Independent banks tended to offer more counseling and referral services, while affiliated banks offered more sophisticated commercial services. Character and cash flow projections were the most important loan decision criteria.
The report concludes that while rural capital markets appear to function well for some participants, credit access remains a challenge for younger and smaller firms. Market structure seems to influence credit availability, with firms in markets dominated by affiliated banks experiencing more constraints. The study emphasizes the need for further research due to the non-conclusive nature of some findings and the underrepresentation of very young, start-up enterprises in the sample.
