| Motivated by consolidations in the banking industry, this study examines the impact of bank structure on lending to small businesses and small farms. Past research reveals that small banks play a central role in financing small firms and small agricultural borrowers, and that the trend within the larger, consolidated banking organizations is away from these bank dependent borrowers. Hence, as smaller banks are absorbed into larger, more complex banking structures, credit availability to small businesses and small farms may be curtailed. This research explores the impact of the Texas bank structure in light of this problem. It expands the literature by developing a formal conceptual analysis regarding the relationship between bank organizational portfolio risk and bank deposits invested in bank dependent loans. The information hypothesis of this study is that smaller, more simple banking organizations are better able to mitigate private information asymmetries inherent in bank dependent lending, therefore devote more deposits to these types of loans. The analysis employs new data on small business and farm loans from the bank call report files in an OLS reduced form specification. The bank dependent loan to deposit ratios categorized by small business loans and small farm loans are the two primary dependent variables, thereby capturing specialization in this type of lending. Differences across regressions are also examined to isolate variations across bank structures in information asymmetries between deposits devoted to bank dependent loans versus their large loan counterpart. In part, this additionally serves as a control for organizational portfolio risk by capturing the asset allocation decision between these two loan types and all other assets. Additionally, variations across bank structures in information asymmetries are also isolated by examining differences between the allocation of deposits in bank dependent loans between the more information sensitive non real estate loans and those secured by real estate. Overall, the research results indicate that not only small banks, but in-state holding company and low to moderately branched bank structures devote more of their deposits to small business and small farm lending. In this respect these structures possess a market niche in these type of loans. This niche appears to arise from the less complicated banking structures' capacity to mitigate acute informational asymmetries inherent in bank dependent lending through more effective production and use of private information. As this research suggests, if these simpler, smaller banking structures continue to exist, it will be because they fill a niche in the market for bank dependent loanable funds. |