News Release

SMALL BUSINESS LENDING PATTERNS IN CALIFORNIA

In the January 22 Western Banking issue of the FRBSF Economic Letter (99-03), San Francisco Fed Economist John Krainer and Banking Analyst John Beauchamp use a newly available data set to assess the extent of out-of-market competition in California's small business lending. Out-of-market firms are competitors with no branch presence in a local area, such as large, nationally recognized credit card banks.

The data set arises from a recent change in the regulations for the Community Reinvestment Act of 1977 (CRA), which requires banks and savings associations to report the amount and location of small business and farm loans originated each year. They use these data to examine small business lending patterns "in both small (deposits less than $500 million) and large (deposits greater than $3 billion) banking markets in California."

"The CRA data reveal that out-of-market competition for small business lending can be significant in some [California] banking markets," Krainer and Beauchamp explain. For example, out-of-market banking institutions make up a majority--70% on average--of the total number of lenders in most markets, both large and small. However, the share of the dollar-volume of loans made by out-of market-lenders varies considerably: In small markets, it ranges from less than 10% to around 70%, while in large markets, the range is much smaller--from 12% to 25%.

The authors conclude that the new data do not provide regulators with easy tests of market competitiveness, because these out-of-market institutions may not offer other banking activities. Still, "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."