2021 Community Banking in the 21st Century Research and Policy Conference

Research Papers, Authors and Key Findings


Concurrent Research Paper Session 1
Paycheck Protection Program (PPP) Lending

Government Loan Guarantees During a Crisis: The Effect of the PPP on Bank Lending and Profitability

Authors: Padma Sharma, Federal Reserve Bank of Kansas City; W. Blake Marsh, Federal Reserve Bank of Kansas City

Key Findings: The authors provide empirical evidence that community bank participation in the Paycheck Protection Program (PPP): was driven by risk aversion rather than profitability; was concentrated among banks with ample funding; and mitigated potential declines in business lending and net interest income. They conclude the PPP not only fulfilled small businesses' funding needs during the pandemic, but also indirectly supported the margins of banks that made these loans.

The Effect of the PPPLF on PPP Lending by Commercial Banks

Authors: Sriya Anbil, Board of Governors of the Federal Reserve System; Mark Carlson, Board of Governors of the Federal Reserve System; Mary-Frances Styczynski, Board of Governors of the Federal Reserve System

Key Findings: The authors analyze the role of the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF) in providing credit to small businesses under the Paycheck Protection Program. They found commercial banks using the PPPLF extended more than twice as many loans, relative to their total assets, as banks that did not use the PPPLF. They also found banks’ familiarity with the operation of the Federal Reserve’s discount window [strongly predicts whether] banks register with and utilize the PPPLF.


Concurrent Research Paper Session 2
Credit Provision to Marginalized Borrowers

Do Minority Banks Matter?

Author: Prithu Vatsa, University of Miami

Key Findings: This paper empirically examines the elasticity of minority credit supply to deposit shares of minority depository institutions (MDIs). The author found a significant and persistent minority credit supply gap results when a neighborhood loses the presence of a local minority-owned bank. MDIs also significantly reduce the minority homeownership gap. The author’s findings reveal minority credit declined by 37% for up to six years in census tracts that lose their MDIs. Minority credit decline is more severe in census tracts that physically lose an MDI branch.

Do Mortgage Lenders Compete Locally? Implications for Credit Access

Authors: Adam Jørring, Boston College; Greg Buchak, Stanford University

Key Findings: The authors’ analysis of household credit access shows that local market concentration strongly affected lending standards and upfront fees on mortgages. It also resulted in higher application rejection rates and reduced the risk of originated mortgages. These findings suggest that, contrary to current policy, regulators concerned with credit access should regard mortgage markets as local when making policy decisions such as bank merger approvals.


Concurrent Research Paper Session 3
Unintended Effects of Oversight

Strategically Staying Small Regulatory Avoidance and the Community Reinvestment Act

Authors: Carlos Parra, Pontifical Catholic University of Chile; Jordan Nickerson, MIT; Jacelly Cespedes, University of Minnesota

Key Findings: A 1995 revision to the Community Reinvestment Act (CRA) led to a two-tiered evaluation scheme determined by the size of a bank's assets. While the intention for the 1995 reform was to “replace paperwork and uncertainty with greater performance, clarity, and objectivity," the revisions also included the creation of two bank classifications: small banks and large banks. Determined by year-end assets being greater or less than $250 million, banks in each group faced significantly different regulatory requirements, creating an incentive to strategically manage assets to stay below the small bank threshold of $250 million. By bunching banks below the small bank threshold, the authors found that banks exploited the 1995 revision of the Community Reinvestment Act (CRA) by strategically slowing growth. They also found regulatory avoidance increased rejection rates of low- and moderate-income loans and decreased the county-level share of small establishments. Taken together, the authors’ findings reveal an unintended consequence of the CRA, whereby strategic avoidance of the regulation reduces credit access for individuals the CRA is designed to benefit.

Small Bank Financing and Funding Hesitancy in a Crisis: Evidence from the Paycheck Protection Program

Authors: Tetyana Balyuk, Emory University; Nagpurnanand Prabhala, The Johns Hopkins University; Manju Puri, Duke University

Key Findings: The authors studied the delivery of subsidized financing to small businesses through bank intermediaries in the Paycheck Protection Program (PPP). Emspirical findings revealed larger firms gained earlier PPP access, consistent with banks’ priorities shaping the PPP delivery. However, the authors found this was not always the case, particularly for small banks that had established prior relationships with their respective small business customers, which likely reflects the importance of small firms for small banks. The findings reinforce the existing banking literature in suggesting small businesses benefit from pairing up with small banks. In addition, the authors found hesitancy in PPP participation reflected recipients' wariness of government investigative power over recipients.


Concurrent Research Paper Session 4
The Effect of Bank Supervision on Credit Allocation

The Real Effect of Bank Supervision: Evidence from On-Site Inspections

Authors: Andrea Passalacqua, Board of Governors of the Federal Reserve System; Paolo Angelini, Bank of Italy; Francesca Lotti, Bank of Italy; Giovanni Soggia, Bank of Italy

Key Findings: The authors show bank supervision reduces distortions in Italian credit markets and generates positive spillovers for the real economy. After an audit, financial intermediaries are more likely to reclassify loans as non-performing and make loans to more productive firms. As a result, productive firms invest more in labor and capital and as a result they grow faster. At the aggregate level, local economies experience an increase in the number of new companies, employment, and productivity. Taking together these results reveal that bank supervision is an important complement to regulation in improving credit allocation.

The Life Cycle of a Bank Enforcement Action and Its Impact on Minority Lending

Authors: Rimmy Tomy, The University of Chicago; Byeongchan An, The University of Chicago; Robert Bushman, University of North Carolina; Anya Kleymenova, Board of Governors of the Federal Reserve System

Key Findings: This paper studies the role bank supervision plays in improving access to credit for minorities by investigating how enforcement decisions and orders (EDOs) affect bank borrowers. The authors find banks significantly increase residential mortgage lending to minorities after the termination of an EDO and increase their market share of lending to this group in counties where they operate. EDO banks are also less likely to deny loans to minority borrowers. The paper explores various reasons for this expansion of lending to minority communities, including remediation of issues, increased competition from non-EDO banks, and catering to banks’ regulators to influence their perceptions and gain future leniency. The paper finds evidence in support of the catering mechanism. In particular, the authors find that banks with stricter regulators, more severe enforcement actions, and low CRA ratings are more likely to increase lending to minorities after EDO terminations.


Pre-Recorded Research Paper Session

Determinants of Losses on Construction Loans: Bad Loans, Bad Banks, or Bad Markets?

Authors: Lynn Shibut, Federal Deposit Insurance Corp.- FDIC; Emily Johnston Ross, Federal Deposit Insurance Corp.- FDIC; Joseph Nichols, Board of Governors of the Federal Reserve System

Key Findings: In this study, the authors explored the extent to which observed losses on construction loans were driven by characteristics of the loans, originating banks and local markets. They found that risk exposure on construction loan portfolios was influenced not only by the originating bank’s behavior but also by the behavior of other local lenders in the market at the time of origination. The authors’ findings support existing regulatory guidance regarding higher capital requirements for construction loans.

Mandatory Disclosure and Takeovers: Evidence from Private Banks

Authors: Jing Wen, Columbia University; Urooj Khan, The University of Texas; Doron Nissim, Columbia University

Key Findings: The authors investigated the role of mandatory financial disclosure in the takeover market for privately held U.S. banks. They found that banks with reduced frequency and granularity of regulatory reporting experienced a relatively lower likelihood to be targeted in M&As and their acquirers encountered lower bid-announcement stock returns following a quasi-exogenous regulatory change in March 2015. This is consistent with acquirers relying on public information to identify potential targets and to conduct preliminary due diligence.

Fighting Failure The Persistent Real Effects of Resolving Distressed Banks

Authors: Ivan Ivanov, Board of Governors of the Federal Reserve System; Stephen Karolyi, Carnegie Mellon University

Key Findings: In this study, the authors show empirically that resolutions of distressed banks lead to reductions in employment and establishment growth of up to six percentage points. These effects are concentrated in small, less urban counties, and accompanied by large declines in business lending and increases in corporate bankruptcies. These results imply that acquiring banks restrict lending to the small business borrowers of distressed target banks.