Review of Industrial Organization 19: 437–452, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Does Local Competition Impact Interest Rates
Charged on Small Business Loans? Empirical
Evidence from Canada
Director of Research, Canadian Federation of Independent Business
Department of Economics, University of Waterloo, 200 University Ave. W., Waterloo, Ontario,
Canada N2L 3G1
Abstract. Using a unique survey database of Canadian small business loans, we ﬁnd a negative
and statistically signiﬁcant relation between the number of local competitors and small business loan
rates. This result is robust to the presence of a wide variety of covariates intended to proxy the effects
of both loan speciﬁc details and individual characteristics. These ﬁndings further suggest that the
local markets deﬁnition applied to small business loans is still relevant, despite recent technological
innovation such as internet banking.
Key words: Banks, competition, local markets, small business loans.
There exists substantial research which has estimated the effects of local com-
petition among banks in the United States (U.S.) on prices charged for various
Two fundamental conclusions emerge from this
work: First, markets for some bank commodities, such as small business loans,
are local in nature; second, an increase in market concentration among banks is
signiﬁcantly correlated with higher prices.
Most of these studies employ data drawn from surveys of bank deposit and
loan rates. These surveys seem to lack information on individual or loan-speciﬁc
characteristics, as empirical estimates based on these data sets are usually not con-
ditioned on factors such as the loan and collateral amount, age and experience of
the borrower, relationship of the entrepreneur with his/her ﬁnancial institution, etc.
We would like to thank Prof. Jim Brox, Prof. William Shepherd, and two anonymous referees
for useful comments. We also acknowledge excellent research assistance by Derek Picard. The usual
Berger and Hannan (1989), Hannan (1990, 1997) and Prager and Hannan (1999).
These local markets are usually deﬁned in terms of Metropolitan Statistical Areas (MSAs).