Why do small banks focus on small loans?
One explanation of the tendency for small banks to devote a larger share of their funds to small business lending is that there are clear limits to the size of the loans a small bank can make. If loans are too big relative to the rest of the bank, the bank becomes undiversified and may suffer sudden, catastrophic losses. Most banks have internal policies setting limits on the amount they will lend to any single borrower; in general, regulations require that this limit be no more than 15 percent of the bank’s capital. The average bank with $100 million or less in assets simply cannot make loans larger than $1 million without running afoul of these limits. Bigger banks can make large loans and still be diversified. As a result, small loans may decline as a share of assets because other loans increase, not because small loans fall. Another possibility is that small banks concentrate on small loans because they cannot compete for larger loans. To some degree, smaller banks might tend to be
