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Does “small bank advantage” really exist? Evidence from China

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  • Zhang, Xiao-mei
  • Song, Zhuo-lin
  • Zhong, Zhen

Abstract

A small bank advantage indicates that small banks have a comparative advantage in granting relationship lending to small- and medium-sized enterprises (SMEs). This paper used loan data from Chinese SMEs to test this hypothesis during a financial crisis and during non-crisis times. Compared with large banks, small banks are only superior in offering SMEs relationship lending through a pre-existing relationship, regardless of the financial crisis. Without pre-existing relationships, small and large banks have no advantage in providing loans to SMEs. We also find that there is no significant positive association between bank size and whether an SME changes its lending bank or the number of its financing sources, regardless of whether there is currently a financial crisis. The results indicate that small banks fail to maintain a strong relationship with SMEs, possibly because of the hold-up problem resulting from relationship lending.

Suggested Citation

  • Zhang, Xiao-mei & Song, Zhuo-lin & Zhong, Zhen, 2016. "Does “small bank advantage” really exist? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 368-384.
    • Handle: RePEc:eee:reveco:v:42:y:2016:i:c:p:368-384
    DOI: 10.1016/j.iref.2015.10.009
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    1. Hasan, Iftekhar & Jackowicz, Krzysztof & Jagiełło, Robert & Kowalewski, Oskar & Kozłowski, Łukasz, 2021. "Local banks as difficult-to-replace SME lenders: Evidence from bank corrective programs," Journal of Banking & Finance, Elsevier, vol. 123(C).
    2. Iwanicz-Drozdowska, Małgorzata & Jackowicz, Krzysztof & Kozłowski, Łukasz, 2018. "SMEs' near-death experiences. Do local banks extend a helping hand?," Emerging Markets Review, Elsevier, vol. 37(C), pages 47-65.
    3. Dia, Enzo & Jiang, Lunan & Menna, Lorenzo & Zhang, Lin, 2023. "Interest margins, lending rates and bank productivity among Chinese provinces," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 104-127.
    4. Lei Xu & Qian Liu & Bin Li & Chen Ma, 2022. "Fintech business and firm access to bank loans," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4381-4421, December.

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    More about this item

    Keywords

    Bank size; Financial crisis; Small bank advantage; Soft information; Relationship lending t; echnology;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L29 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Other

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