Smaller US businesses and towns are likely to be hit hardest by bank turmoil

Published on13 APR 2023
Markets Regional Analysis

Stress in U.S. banking, which has been concentrated among small and midsize lenders, is likely to hit smaller American businesses the hardest, according to Goldman Sachs Research. The financial jitters that started with Silicon Valley Bank’s collapse may also have a bigger impact outside of large cities.

Companies with fewer than 100 employees are a critical part of the U.S. economy: they employ 35% of the private-sector workforce and generate a quarter of gross output. And they rely disproportionately on small banks for borrowing, receiving almost 70% of their commercial and industrial loans from banks with less than $250 billion in assets and 30% from banks with less than $10 billion in assets (versus 45% and 10% for larger businesses, respectively), Goldman Sachs economists Ronnie Walker and Manuel Abecasis wrote in the team’s report. Put another way: At least 70% of small business lending is done by smaller banks in 95% of counties, which account for more than 80% of GDP.


Bank stress is likely to reduce lending growth by 2-6 percentage points, according to estimates from Goldman Sachs Research. “Because small banks are likely to tighten credit more aggressively and small businesses disproportionately borrow from them, the hit to lending to small businesses will likely be larger,” Walker and Abecasis wrote. The services and construction sectors have the largest concentration of small businesses.

Geography also tends to matter. The physical distance between lenders and the customers has, on average, increased over time amid bank consolidation and the growing popularity of online banking. But even so, our economists find that a substantial share of small business lending is still done locally, often by small banks: 60% of loans to small businesses are made by banks within 10 miles of the borrower and around 75% of loans are made by banks within 25 miles of the borrower.


A key question is whether small businesses will be able to look to larger institutions if credit gets harder access. The answer partly depends on the willingness and ability of larger banks to make those loans, according to Goldman Sachs Research. In places where they don’t operate, bigger institutions may be more reluctant to lend to small businesses that aren’t already customers because it’s harder to assess the riskiness of loans to individual small businesses (which also tend to be riskier borrowers). Furthermore, economic research suggests that part of the reason that small banks disproportionately lend to small businesses in the first place is because their closer geographic proximity to individual small businesses gives them an informational advantage in gauging the creditworthiness of those borrowers.   

And in many counties across the U.S., there’s no nearby alternative to smaller banks. There isn’t a globally systemically important bank (GSIB) branch in roughly two thirds of counties, making up 10% of U.S. GDP, according to Goldman Sachs Research. For those same counties, the closest GSIB branch is roughly 40 miles away, compared with 3 miles away for other counties. Our economists also find that non-GSIB banks provide 90% of loans to small businesses in more than half of U.S. counties.

States that are more rural and Republican-leaning (based on the state having more than two-thirds of its congressional delegation from that party) tend to have fewer GSIB branches, and as a result may see a larger drag on lending growth. Seven of the ten states with the lowest GDP-weighted share of counties with a GSIB branch are Republican-leaning states. Only two — Vermont and Maine — are Democratic-leaning states (using the same congressional delegation criteria).



There are also challenges for small business to get access to lending from non-banks, which can include hedge funds, pension funds and insurance companies. While U.S. businesses have become significantly less reliant on the banking system in the last few decades, small companies continue to use banks much more than other sources of financing, according to Goldman Sachs Research. Moreover, survey data indicates small enterprises like doing business with their small lenders. “Small businesses are more satisfied with small banks on net compared to other sources of financing,” Walker and Abecasis wrote.

This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

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