If you're worried about the effect of bank consolidation on small-business lending, rest assured: Federal Reserve Board Chairman Alan Greenspan is keeping an eye on it. In fact, the central bank is working on its third survey of 6,000 small businesses -- the 1998 Survey of Small Business Finances -- the Fed chairman announced on Mar. 9.

So far, entrepreneurs don't seem to be suffering too much from consolidation, he said in a speech on access to capital to a Fed conference in Arlington, Va. After all, small-business lending rose almost 6% a year from 1994 to 1998, Fed Governor Edward M. Gramlich pointed out in a separate speech on Mar. 8. Greenspan observed: "Studies of dynamic effects of bank mergers and acquisitions suggest that while mergers are apt to reduce small-business lending by the participants, this decline appears to be offset in part, or even in whole, by an increase in lending by other institutions in the same local market."

A study by the San Francisco Fed (see Business Week's Frontier Online, "Who'll Minister to the Small Fry?" January 26, 1999) found as much. It noted that out-of-town lenders -- including those that offer credit cards -- were filling the gap when local banks closed. That said, Greenspan did sympathize with entrepreneurs who lose long-standing relationships with local lenders: "I think it is safe to say that, whatever their cost advantages, large automated systems can never fully displace the value of personal contact and familiarity with local economic circumstances, which are the keystone of community banking."

There's one cloud: lending to small, minority-owned businesses. Greenspan said studies show "discrepancies in turndown rates" that can't be explained by income, poor credit history, or weak balance sheets. If discrimination is the reason, he warned, lenders are shooting themselves in the foot by missing business opportunities with profitable entities.

What's the Fed doing to improve small-business access to capital? Greenspan pointed to a joint Cleveland Fed/Small Business Administration initiative to expand access, a Boston Fed curriculum to train agencies that aid microenterprises in lending and finance, and Kansas City Fed research on innovative ways to get equity to rural entrepreneurs.

By Julia Lichtblau in New York
julia_lichtblau@businessweek.com

To: FINANCE