Does “Relationship Lending” Protect Small Banks When the Local Economy Stumbles?
By John R. Hall and Timothy J. Yeager Despite the bank-merger trend that continues to create ever-larger banking organizations, the vast majority of U.S. banks remain community banks. Although the precise definition is elusive, a community bank differs from larger regional and money-center banks in numerous ways. The primary difference is the community bank’s focus on local businesses and depositors. Community banks are typically smaller banks; most have fewer than $500 million in assets. They are more prevalent in rural areas than urban areas, and they typically have simple organizational structures and limited branching operations. Community banks are important intermediaries that fulfill different functions in the banking system than their larger counterparts do. Community banks, for example, provide important access to credit for small businesses. Such loans require more costly evaluation and monitoring than do loans to larger firms because access to information on the borrowing fi
