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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, published in May 1990, investigates how financial deregulation affected the availability of commercial credit in rural areas of Maine, Massachusetts, New Hampshire, and Vermont. The study, funded by the Ford Foundation and the Rural Economic Policy Program of the Aspen Institute, examines both the supply and demand sides of rural capital markets through surveys of small businesses and financial institutions. Key findings include:
- Impact of Deregulation: The study defined financial deregulation broadly, encompassing the expansion of large banks (including interstate banking and increased branching/acquisitions) and expanded commercial lending powers for savings banks. It hypothesized that credit availability would differ based on bank structure (independent vs. branch/holding company) and market structure, potentially leading to qualitative changes in credit (e.g., less personal attention, longer processing times).
- Small Business Credit Experience: While over 50% of start-up capital came from private sources, commercial banks were also significant (27%-35%). Small, younger firms (less than 10 years old, gross sales under $1 million) generally faced more difficulty obtaining commercial credit, especially short-term unsecured loans and long-term loans (greater than 5 years). However, many businesses also “never tried to obtain” certain types of credit, suggesting a potential information gap.
- Market Structure and Credit Availability: The study found a connection between local banking market structure and credit availability. Markets dominated by large, affiliated banks showed greater credit constraints for businesses compared to markets dominated by independent banks. Businesses in affiliated bank markets were more likely to cite credit limitations as a reason for not expanding.
- Business Satisfaction: Around two-thirds of businesses surveyed were satisfied enough to recommend their primary financial institution to others, with slightly higher satisfaction in markets dominated by independent banks. Businesses valued personal service, reliability, and flexible terms, but found their institutions less satisfactory regarding flexibility.
- Commercial Bank Lending Practices: Most commercial banks (around 80%) focused on small business lending and had officer call programs. Constraints on increased lending included inadequate deposit bases (for independent banks) and the overall business climate (for branch/holding company banks). Independent banks were more likely to refer businesses to other capital sources.
- Business Services: A relatively small percentage of businesses used business services offered by banks beyond basic loans. There was a notable lack of awareness among businesses about the availability of various bank services.
- Policy Implications: The report suggests that while rural capital markets function well for some, significant percentages of businesses, especially younger ones, face credit difficulties. It highlights the importance of understanding the influence of market structure on credit availability and the need for further research to address credit gaps and potentially explore alternative financial structures.
Overall, the study provides a detailed empirical analysis of rural commercial credit markets in New England during a period of significant financial change, offering insights into the challenges and perceptions of small businesses and financial institutions.
