Federal Reserve Bank of San Francisco

FRBSF Economic Letter

1999-03 | January 22, 1999

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Small Business Lending Patterns in California

John Beauchamp and John Krainer

Western Banking Quarterly is a review of banking developments in the Twelfth Federal Reserve District, and includes FRBSF’s Regional Banking Tables. It is published in the Economic Letter on the fourth Friday of January, April, July, and October.

The recent trend of bank consolidation in California has once again focused attention on how regulators analyze the competitive effects of mergers. Traditionally, the Federal Reserve has defined banking markets to be local in scope. This practice originates from a Supreme Court decision in 1963 (U.S. v. PNB, 374 U.S. 321) where banking was affirmed to be a “cluster” of activities, such as transactions, deposit-taking, and lending. At that time, deposit accounts were primarily administered through bank branches, so it was reasoned that market boundaries should be drawn to include all banks (with branches) that would affect each other’s pricing decisions. Competition was then measured by the concentration of deposit market shares of the in-market banks.

Bankers have argued and regulators have acknowledged that some components of the banking activities cluster are provided by out-of-market firms (that is, competitors with no branch presence in a local area), and regulators have attempted to control for these outside influences in their competitive analysis. Now it is possible to assess the extent of outside competition, at least in the area of small business lending, in a much more precise way. In this Letter we use a newly available dataset to summarize the basic patterns of small business lending in California in 1997. We also touch briefly on some implications of these data for assessing competition in merger analysis.

The data on small business loans

As a result of recent changes in the regulations for the Community Reinvestment Act of 1977 (CRA), banks and savings associations are now required to report the amount and location of small business and farm loans originated each year. A small business loan is defined to be a loan of less than $1 million that is designated by the reporting institution as either a commercial and industrial loan or a loan secured by nonfarm or nonresidential real estate. The reports include total originations of various size categories of loans by census tract.

One limitation of the CRA data is that they do not draw from the entire universe of lenders–for example, finance companies are conspicuously absent. Furthermore, the data do not include loans originated by small institutions–only institutions with assets greater than $250 million (or of any size if owned by a holding company with greater than $1 billion in assets) are required to file reports. However, the small business lending of the small institutions that are exempt from the CRA filing requirements can be estimated from their balance sheet data; these loans are then allocated to markets according to the size of the institutions’ branches in those markets, as measured by deposits. This approximation is reasonable for small institutions, which typically have very few branches.

Out-of-market lending

Using these data, we investigate the extent to which lending institutions face competition from out-of-market competitors in both small (deposits less than $500 million) and large (deposits greater than $3 billion) banking markets in California. By these criteria, there are 22 small markets and 12 large markets in California. The market definitions employed here are the same as those used by the Federal Reserve in its bank merger analysis. The market boundaries have been drawn to account for factors such as patterns of commerce and commuting (see Cyrnak 1998 for a nationwide study at the county level).

It is clear from Figure 1 that out-of-market banking institutions make up a majority of the total number of lenders in most markets. On average, 70% of the lenders are out-of-market for both small and large markets. For a small banking market like California City (which consists of California City, Mojave, and Tehachapi) the activity of out-of-market firms is quite significant in that it raises the number of lenders from two to twenty. In the large markets, as well, out-of-market institutions significantly increase the number of lenders. In the Los Angeles market, for example, out-of-market lenders raise the number of lenders from 115 to 276.

While the out-of-market lenders may be numerous, the extent of their lending varies considerably by market (see Figure 2). In two small markets, Firebaugh-Mendota and California City, out-of-market lenders account for 70% or more of the dollar volume of small business lending; by contrast, in Tehama County, Porterville, and the Mendocino Coast market (which consists of Fort Bragg, Gualala, Mendocino, and Point Arena), out-of-market lenders account for less than 10%. In large markets there is much less variability. For example, the highest share of lending by out-of-market institutions is 25% for the Palm Springs area. In Los Angeles and San Francisco, the shares are 18% and 12%, respectively. On average, the percentages of loans originated out-of-market are 27% for small markets and 15% for large markets.

Who are the out-of-market lenders? For the case of small markets, the most active lenders are usually large banks with a branch presence in nearby markets. These banks often capture leading shares of these markets’ small business loans. Other key lenders in small markets are large, nationally recognized credit card banks. In fact, in the Mendocino Coast market, credit card banks are the only out-of-market lenders. In large banking markets, credit card banks are also among the major out-of-market participants. For these markets, it is quite common to find low-level activity by large banks with no branch presence in the state or region.


The CRA data reveal that out-of-market competition for small business lending can be significant in some banking markets. But we also must keep in mind that these out-of-market institutions may not offer other components of the banking cluster. These data, then, do not provide regulators with easy tests of whether a given market is currently competitive or not. But, at the very least, the data give regulators a better picture of how the lending demands of a business community are being served in a region.

John Beauchamp
Banking Analyst

John Krainer


Cyrnak, A. 1998. “Bank Merger Policy and the New CRA Data.” Federal Reserve Bulletin 84 (September) pp. 703-715.

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System. This publication is edited by Sam Zuckerman and Anita Todd. Permission to reprint must be obtained in writing.

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