Despite conventional wisdom, a new study shows that small banks aren't always the best option when looking for a small business loan.
Researchers at Harvard and Yale universities found that local banks, which are thought to be best for small businesses because their decentralized lending structure gives branch managers autonomy over lending decisions, only are the best option for financing small businesses if they face local competition.
"We show that it is true that decentralized banks create better lending outcomes for small firms than centralized banks, precisely because of the discretion granted to local branch managers," said researcher Rodrigo Canales of the Yale School of Management. "The huge caveat is that this is only true when there’s competition."
According to the study, without competition, the same discretion that branch managers have shaping lending decisions to the local environment also allows them to exploit their power by cherry-picking the best firms, approving smaller loans and charging higher interest rates.
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