2020 Community Banking in the 21st Century Research and Policy Conference

Research Papers, Authors and Key Findings

Concurrent Research Paper Session 1
The Future of Community Banking

Shared Destinies? Small Banks and Small Business Consolidation

Author: Jonathan Pogach, Federal Deposit Insurance Corp.- FDIC

Key Findings: The study investigates whether changes in the composition of businesses affects the composition of the banking industry. It finds that small-firm employment is positively associated with small bank deposits, income, and small business lending but not associated with large-bank balance sheets and income. The authors link their results to the propensity of small banks to be acquired. The findings are consistent with a view that, in the absence of small-business financial service demand, a large-bank business model based on economies of scale may be more profitable than a small-bank business model based on comparative advantages in relationship lending. While many existing policies seek to support small businesses through the support of small banks, the authors’ results suggest supporting small businesses could be a potential mechanism for supporting small banks.

Bank Entrepreneurs

Author: Chiwon Yom, Federal Deposit Insurance Corp.- FDIC

Key Findings: The study analyzes the characteristics of entrepreneurs who participated in the opening of 185 de novo banks from 2000 to 2008, and how these characteristics influenced subsequent bank performance. These bank entrepreneurs were driven by local opportunities, and also had significant banking and managerial experience, particularly at small banks, unique local knowledge and the networks necessary to raise local funding. Prior employment experiences had a causal effect on bank investment strategies and performance. For instance, prior experience in the real estate industry predicted a higher rate of commercial real estate lending, especially for construction and development loans. These results provide insights that can guide policies that support entrepreneurship and financial stability.

Moderator Elena Loutkina and Discussant Mike Butler Response

The Future of Community Banking: Q&A

Concurrent Research Paper Session 2
Community Development and Support

“Revitalize or Stabilize”: Does Community Development Financing Work?

Author: Daniel Ringo, Board of Governors of the Federal Reserve System

Key Findings: The study uses data obtained from bank performance evaluations under the Community Reinvestment Act to estimate how increased community development lending and investment affects local economic activity. It finds that lending increases wages and employment (at a rate of one job per $56,000 in loans), but does not increase the supply of affordable housing or the growth of house prices. Evidence on the effect of investments is inconclusive. These findings are important insofar as banks in the United States originate $100 billion in community development loans annually and hold similar amounts of community development investments on their balance sheets.

The Propagation of Local Credit Shocks: Evidence from Hurricane Katrina

Author: Samir Elsadek Mahmoudi, Georgia State University

Key Findings: In the aftermath of Hurricane Katrina, banks operating in multiple markets diverted financial resources to areas that were damaged, where demand was high for housing and mortgages, from areas that were undamaged. A resulting credit tightening in the undamaged areas reduced housing prices and slowed construction activity. Community banks, being unexposed to damaged areas, partially insulated their local markets from these spillovers.

Moderator Lamont Black and Discussant Alden McDonald Response

Community Development and Support: Q&A

Concurrent Research Paper Session 3
Local Lending and Credit Access

Big Banks, Household Credit Access and Intergenerational Economic Mobility

Author: Erik Mayer, Southern Methodist University

Key Findings: The study examines access to credit for low-income borrowers provided by local banks. It finds that small banks approve a higher percentage of mortgage applications than large banks and that mortgage approval rates decrease with increased distances to branch locations. These results indicate that “soft” information is important when lending to low-income households and that smaller banks incorporate more of this information into their lending decisions. The author also finds that intergenerational economic mobility is lower in areas where banks are larger, raising the question of whether consolidation in the banking industry contributes to economic inequality.

Government-Sponsored Wholesale Funding and the Industrial Organization of Bank Lending

Author: Dayin Zhang, University of Wisconsin-Madison

Key Findings: The study shows that a bank’s access to low-cost funding through the Federal Home Loan Bank (FHLB) is associated with an 18-basis-point reduction in its mortgage rates and a 16% increase in its mortgage lending. This effect, moreover, is 25% stronger for small community banks. The authors also find that intensified local competition pushes other lenders to lower their mortgage rates as well, and overall market lending grows. The authors conclude that the FHLB increases annual mortgage lending in the U.S. by $50 billion and saves borrowers $4.7 billion in interest payments every year, through changing the competitive landscape of the mortgage market.

Moderator Amiyatosh Purnanandam and Discussant Vernon Hirata Response

Local Lending and Credit Access: Q&A

Concurrent Research Paper Session 4
Moral Hazard Issues in Regulation and Oversight

How Important Is Moral Hazard For Distressed Banks?

Author: Ajay Palvia, Federal Deposit Insurance Corp.- FDIC

Key Findings: This study examines incentives for distressed banks to increase risk-taking as a consequence of deposit insurance and other related elements of the bank safety net.  The moral hazard incentives of the bank safety net predict that distressed banks take on more risk and higher leverage. The authors investigate two distinct periods, the first being 1985-1994 and the other being 2005-2014. They both encompassed a financial crisis and were subject to different regulatory regimes. Rather than expand leverage, the authors found that distressed banks took actions to reduce leverage by shrinking assets, closing branches, cutting employees, reducing deposits, reducing deposit rates, adding equity capital and cutting dividends. They also reduced risk, as evident in lower non-performing loans and earnings volatility. The authors conclude that role of moral hazard is limited and that the deleveraging of banks is independent of regulatory regime.

Insurance Pricing, Distortions, and Moral Hazard. Quasi- experimental Evidence from Deposit Insurance

Author: George Shoukry, Federal Deposit Insurance Corp.- FDIC

Key Findings: The author finds evidence that differentials in insurance premiums under risk-based deposit insurance provide banks with incentives to curb excessive risk-taking, which points to the effectiveness of risk-based pricing. However, the evidence also identifies distortionary effects as institutions paying higher premiums shifted their funding sources away from deposits and engaged in an intricate form of regulatory arbitrage to lower their total burden of deposit insurance premiums. This erodes the effectiveness of risk-based pricing and highlights the importance of strong regulatory controls when risk-based insurance pricing is used.

Moderator Lamont Black and Discussant Alden McDonald, Jr. Response

Community Development and Support: Q&A