Small bank loan quality in a deregulated environment: the information advantage hypothesis

A number of studies and banking practitioners have questioned the ability of small banks to survive in a deregulated environment. We consider the hypothesis that small community banks actually have an information advantage in evaluating and monitoring loan quality. We call this the information advantage hypothesis (IAH). We evaluate four loan quality measures for a sample of all Florida banks for the period 1986 to 1996. There is no systematic evidence that loan quality is greater at small banks. Both net chargeoffs and loan loss provisions are lower at small banks in non metropolitan areas than at other banks, which is consistent with the IAH. However, other measures of loan quality---nonperforming loans and other real estate owned---are higher at small banks.