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A Two-step Analysis of Standardized Versus Relationship Bank Lending to Small Firms

Using the 1998 Survey of Small Business Finances and banking data to produce a bank-firm match, the author tests for evidence of standardized versus relationship lending methods in both total bank credit and credit emanating from the firm’s most important source of financial services, its primary bank. The author employs a two-step Heckman procedure to test the likelihood a small firm has bank debt, then, conditional upon having debt, the level of credit outstanding. By comparing the determinants of bank and firm characteristics of primary bank credit with credit from all bank sources, she finds that relationship lending is inherent within the primary bank, whereas competing bank sources tend to employ standardized lending techniques such as credit scoring. With respect to credit availability, however, no clear dominance of one method over the other prevails.