This paper assesses different organizational forms in terms of their ability to generate information about investment projects and allocate capital to these projects efficiently. A decentralized approach–with small, single-manager firms–is most likely to be attractive when information about individual projects is “soft ” and cannot be credibly transmitted. Moreover, holding fixed firm size, soft information also favors flatter organizations with fewer layers of management. In contrast, large hierarchical firms with multiple layers of management are at a comparative advantage when information can be costlessly “hardened ” and passed along within the hierarchy. As a concrete application of the theory, the paper discusses the consequences of consolidation in the banking industry. It has been documented that when large banks acquire small banks, there is a pronounced decline in lending to small businesses. To the extent that smallbusiness lending relies heavily on soft information, this is exactly what the theory would lead one to expect.

Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally “difficult ” credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks.

Small banks are a major source of credit for small businesses. As banking consolidation continues, will a resulting decline in the presence of small banks adversely affect the availability of that credit? In May 1995, Texas became the first state to opt out of the interstate branching provision of the Riegle-Neal Interstate Banking and Branching Act of 1994. In Texas, foes of interstate banking and branching voiced a concern over how consolidation might affect small business lending and community development. If small banks are increasingly acquired by large, superregional banking companies, they argued, consolidation will have a negative effect on the availability of credit to small businesses and communities. Proponents countered by arguing that despite consolidation, the need for independent community banks will remain, leaving an

Banking industry consolidation has raised concern about the supply of small business credit since large banks generally invest lower proportions of their assets in small business loans. However, we find that the likelihood that a small business borrows from a bank of a given size is roughly proportional to the local market presence of banks of that size, although there are exceptions. Moreover, small business loan interest rates depend more on the size structure of the market than on the size of the bank providing the credit, with markets dominated by large banks generally charging lower prices.

We study the effects of structural changes in banking markets on the supply of credit to small businesses. Specifically, we examine whether bank mergers and acquisitions (M&As) and entry have "external " effects on small business loans by other banks in the same local markets. The results suggest modest positive external effects from these dynamic changes in competition, except that large banks may reduce small business lending in reaction to entry. We confirm bank size and age as important determinants of this lending, and show that the measured age effect does not appear to be driven by local market M&A activity.

We study the dynamics of market entry following mergers and acquisitions (M&As), and the behavior of recent entrants in supplying output that might be withdrawn by the consolidating firms. The data, drawn from the banking industry, suggest that M&As are associated with subsequent increases in the probability of entry. The estimates suggest that M&As explain more than 20 % of entry in metropolitan markets, and more than 10% of entry in rural markets. Additional results suggest that bank age has a strong negative effect on the small business lending of small banks, but that M&As have little influence on this lending.

he U.S. government enacted the Banking Act of 1933, commonly known as the Glass-Steagall Act, at least partially to calm fears stemming from bank failures during the Great Depression. While there has been recent debate concerning

We survey the most recent BIS proposals for the credit risk measurement of retail credits in capital regulations. We also describe the recent trend away from relationship lending toward transactional lending in the small business loan arena. These trends create the opportunity to adopt more analytical, data-based approaches to credit risk measurement. We survey proprietary credit scoring models (such as Fair Isaac), as well as options-theoretic structural models (such as KMV and Moody’s RiskCalc), and reduced-form models (such as Credit Risk Plus). These models allow lenders and regulators to develop techniques that rely on portfolio aggregation to measure retail credit risk exposure.

The views expressed here are those of the authors and do not necessarily reflect those of the Federal

In recent years, foreign bank participation has increased tremendously in Latin America. While some argue that foreign bank entry will benefit Latin American banking systems by lowering loan and deposit volatility and increasing efficiency, others are concerned that foreign banks might choose to extend credit only to certain customers, leaving some sectors - like small businesses - unattended. This paper examines this last issue. In particular, using bank level data for Argentina, Chile, Colombia, and Peru during the mid-1990s, this study empirically investigates whether bank origin affects the share and growth rate of bank lending to small businesses.