Research Papers, Authors and Key Findings
Research Paper Session 1
Small Business Lending
Did Bank Small-Business Lending in the U.S. Recover After the Financial Crisis?
Author: Rebel Cole, Florida Atlantic University
How Important are Local Community Banks to Small Business Lending? Evidence from Mergers and Acquisitions
Abstract: We investigate the shrinking community banking sector and the impact on local small business lending (SBL) in the context of mergers and acquisitions. From all mergers that involved community banks, we examine the varying impact on SBL depending on the local presence of the acquirers’ and the targets’ operations prior to acquisitions. Our results indicate that, relative to counties where the acquirer had operations before the merger, local SBL declined significantly more in counties where only the target had operations before the merger. This result holds even after controlling for the general local SBL market or local economic trends. These findings are consistent with an argument that SBL funding has been directed (after the mergers) toward the acquirers’ counties. We find even stronger evidence during and after the financial crisis. Overall, we find evidence that local community banks have continued to play an important role in providing funding to local small businesses. The absence of local community banks that became a target of a merger or acquisition by nonlocal acquirers has, on average, led to local SBL credit gaps that were not filled by the rest of the banking sector.
Similarities and Differences in Small Business Lending Between Small and Large Banks: Findings from the Small Business Lending Survey
The authors analyze the small business lending practices of banks using a nationally-representative survey conducted by the Federal Deposit Insurance Corporation. They document that both small and large banks have distinct advantages in lending to small businesses, with small banks more likely to emphasize relationship lending technologies and large banks more likely to use transactional ones. However, they also find that small business lending for all-sized banks is in general characterized by practices that are locally-based, relationship-oriented, and high-touch (meaning, staff-intensive).
Research Paper Session 2
Competition in Banking
The Effects of Competition in Consumer Credit Markets
This paper provides evidence that greater competition from credit unions induce banks to become more efficient, with consumers benefitting from higher deposit rates and lower borrowing costs. However, shadow banks change their credit policy and aggressively expand credit to riskier borrowers, resulting in higher default rates. The authors conclude that increased competition can lead to large changes in credit policy at institutions outside the traditional supervisory umbrella, possibly creating a less stable financial system.
Abstract: The effects of industry consolidation are felt acutely at the branch level: in 1994, branches of banking organizations with fewer than $1 billion in assets represented 37% of the over 81,000 national bank branches. By 2016, small bank branches had fallen to 26% of the national total despite bank branches increasing by 13% industry-wide. We provide new insights on the effects of consolidation within the banking industry by documenting the variation of these trends across the metropolitan statistical area (MSA) and non-MSA divide. We show that overall branch and deposit growth is highest in MSAs both in relative and absolute terms. While small bank branches and deposits have declined within and outside of MSAs, we find that the decline is steeper in the MSAs, which also happen to be where large bank expansion is concentrated. We employ a difference-in-differences approach to consider the role that large bank competition plays in the performance of community banks. We use large bank expansion through mergers and acquisitions of medium-sized banks as a quasi-experiment to changes in the small bank competitive environment. We find that large bank entrance impacts small banks positively: branches of small banks that are more exposed to large bank entrance do not display worse performance outcomes, and areas of greater exposure exhibit increased small bank expansion following large bank merger activity. These results are supportive of economic theory, survey evidence on bank competition and the existing literature.
Author: Mikael Homanen, Cass Business School, City, University of London
The author observes decreases in deposit growth at nine “major” banks that financed the controversial Dakota Access Pipeline, particularly among branches located closest to the pipeline and branches in environmentally or socially conscious counties. He also finds that local savings banks were “beneficiaries of this unanticipated depositor movement."
Research Paper Session 3
Bank Management and Performance
This paper finds that CEO replacement at rural banks, relative to urban banks, does not require compromises that are evident in subsequent declines in performance as assessed by regulators. These results are inconsistent with the notion that rural banks are threatened by “talent migration” and therefore are unable to replace CEOs with the same effectiveness as urban banks.
Abstract: The Dodd-Frank Act requires stress testing for U.S. banks with assets in excess of $10 billion. Smaller community banks are not required to participate in this important information generating exercise. While community banks are clearly too small to generate systemic shocks to the U.S. economy, they are exposed to the recessions caused by systemic shocks. Because hundreds of community banks failed in the aftermath of the 2008-2009 financial crisis, the sensitivity of these banks to systemic shocks poses a concern for both policymakers, community banks, and the job-creating small businesses that depend on a healthy community banking sector. In this paper we estimate a top-down stress testing model built upon the work of Hirtle et al. (2015), but we focus our modeling specifically on community banks. Because our model uses standard econometric techniques and relies solely on publicly available data, it can be used to provide community banks access to otherwise prohibitively expensive macroprudential risk analysis, and may help further stabilize this important financial sector.
Abstract: Banks make more lending and open more branches near their CEO’s birthplace. This reflects hometown favoritism rather than information advantages: the effect is stronger among altruistic CEOs, in struggling counties, and among marginal mortgage applicants. Furthermore, while hometown favoritism does not affect the bank’s profitability, it leads to positive economic outcomes in counties exposed to greater favoritism. Together, our results suggest home favoritism as one channel that deepens credit inequality.
Key Findings: This paper studies increasing investment in technology by banks in recent years. The authors provide evidence of a positive relationship between technological spending and performance that is driven primarily by large banks and reflects improvement in operational efficiency rather than sales increases.