Cookie-Cutter Versus Character : The Micro Structure of Small Business Lending by Large and Small Banks

The informational opacity of small businesses makes them an interesting area for the study of banks' lending practices and procedures. We use a survey of small businesses conducted by the Federal Reserve to analyze the micro-level differences between large banks and small banks in the loan approval process. We provide evidence that large banks ($1 billion or more in assets) tend to employ standard criteria obtained from financial statements in the loan decision process, but that small banks (less than $1 billion in assets) deviate from these criteria by relying to a larger extent on the character of the borrower. Some of the results are inconsistent, however. These quot;cookie-cutterquot; and quot;characterquot; approaches are compatible with the incentives and environments facing large and small banks