Bank switching of US small businesses: new methods and evidence

Abstract

Despite being informationally opaque, small firms often switch from their primary financial institution to transactional lenders, with the relationship banking theory invoking the holdup problem as a culprit explanation. Using US evidence and an estimation strategy that overcomes traditional shortcomings in small business research, our study captures the determinants and, for the first time, the ex post effects of the switching decision. We find that switching is less likely when the primary financial institution is a nearby bank associated with quality services and connected to the firm via other business or social relationships. Small firms become more loyal as they grow in size and pursue nonmortgage credit. Outside the primary relationship, both loan approval and borrowing cost are adversely impacted, however loan maturities are longer. Moreover, the likelihood of pledging collateral remains unaffected, provided that the type of collateral is least sensitive to the borrower’s information environment. Jointly, our findings describe a trade-off inconsistent with the holdup problem, and an opportunity for banks to enhance customer loyalty by improving aspects of the relationship unrelated to the terms of credit.

Economic Challenges And The Potential Threat Of A Debt Trap In Asia

“…In addition, current information technology and risk management may be good enough to allow financial institutions to decentralize credit scoring to more regional branches, increasing opportunities for information exchange with borrowers and increasing efficiency in credit scoring (Harish, Liu, Zhong, & Huang, 2021). The problem of incomplete information between financial institutions and borrowers can still be resolved (Zhang, Han, Kallias, & Kallias, 2022). If financial institutions can exchange information with each other For more use in credit assessment and financial product design.…”