2022 Community Banking Research Conference

Research Papers, Authors and Key Findings

Research Paper Session 1
Information and Bank Lending Terms

Bank Monitoring with On-Site Inspections

Authors: Amanda Heitz, Tulane University; Alex Ufier, federal-deposit-insurance-corporation---fdic; Chris Martin, federal-deposit-insurance-corporation---fdic

Key Findings: Using a proprietary database of nearly 30,000 multiple-draw construction loans, the authors examine empirically the theoretical determinants of bank monitoring within non-syndicated loans, how banks use the information collected when they monitor, and whether monitoring affects loan outcomes.  They show that banks trade off monitoring with more favorable loan origination terms, and negative on-site inspection reports are associated with a greater likelihood of draw denials. They conduct a comprehensive analysis of the determinants of construction loan default and show that more monitoring ultimately decreases loan default.

Bank Loan Markups and Adverse Selection

Authors: Gregory Weitzner, McGill University; Mehdi Beyhaghi, Federal Reserve Bank of Richmond; Cesare Fracassi, University of Texas

Key Findings: The authors analyze market power in local U.S. corporate loan markets. In contrast to typical theories of competition, they find that loan markups are higher in regions in which more banks operate. They provide evidence that this result is driven by asymmetric information across banks, which becomes exacerbated as the number of banks increase. They also provide causal support for the role of adverse selection by showing that markups drop following a shock to large banks’ lending capacities that reduces asymmetric information in local lending markets. Their findings suggest that adverse selection is an important driver of market power in local bank markets and have implications for antitrust policy.

Non-Information Asymmetry Benefits of Relationship Lending

Author: Daniel Rabetti, Tel Aviv University

Key Findings: The author examines the benefits of relationship lending in the Paycheck Protection Program (PPP), a situation where loan credit risk plays little role in the lending decision. He finds that relationship firms—those that receive PPP loans from lenders with whom they have a prior relationship—are granted economically significantly larger loans and faster approvals than transactions firms—those with no such relationships. PPP lenders tend to prioritize relationship firms primarily because of concerns about the increased default risk associated with borrower’s pre-crisis debt. These benefits come with costs, however, as firms are more likely to violate the program’s rules when a relationship exists.

Moderator Response

Research Paper Session 2
Minorities’ Access to Credit

The Impact of Minority Representation at Mortgage Lenders

Authors: Ruidi Huang, Southern Methodist University; Erik Mayer, Southern Methodist University; W. Scott Frame, Federal Reserve Bank of Dallas; Adi Sundaeram, Harvard Business School

Key Findings: The authors use a novel data set that matches mortgage applications to loan officers to examine the links between the labor market for loan officers and access to mortgage credit. They find that minorities are significantly underrepresented among loan officers, and that minority borrowers are less likely to complete mortgage applications, have completed mortgage applications approved and take out a loan. When minority borrowers work with minority loan officers, the authors find, these disparities are greatly reduced and default rates on these loans are lower. They conclude that minority underrepresentation among loan officers adversely affects minority borrowers’ access to credit.

Bank Competition and Entrepreneurial Gaps: Evidence from Bank Deregulation

Author: Xiang Li, Boston College

Key Findings: The author analyzes the effects of bank competition on gender and racial gaps in entrepreneurship, and finds that the increase in competition that followed interstate banking deregulation increased the quantity and quality of banking services provided to minority borrowers. Improved banking services and a reduction in discrimination, the author argues, reduces entrepreneurship gaps by loosening financial constraints on female and minority entrepreneurs, which in turn fosters wealth equality.

“Let Us Put Our Money Together:” Minority-Owned Banks and Resilience to Crises

Authors: W. Scott Langford, Arizona State University; Allen Berger, Darla Moore School of Business, University of South Carolina; Maryann Feldman, Arizona State University; Raluca Roman, Federal Reserve Bank of Philadelphia

Key Findings: The authors examine whether minority-owned banks’ mission to promote economic well-being in their communities and their use of soft-information-based lending yield advantages in serving community needs during financial and economic crises. Their results suggest that minority-owned banks improved economic resilience in their communities and beyond during the Global Financial Crisis and the COVID-19 Crisis through increases in small business and household lending. Fewer benefits, however, were found during other phases of the business cycle. Their findings are consistent with the predictions of the economic resilience literature.

Moderator Response

Research Paper Session 3
Transparency in Supervision and Regulation

The Benefits and Costs of Transparent Supervision of Public Banks: Evidence from Disclosure of SEC Comment Letters

Authors: Amy Hutton, Boston College ; Xin Zheng, University of British Columbia; Yupeng Lin, National University of Singapore; Susan Shu, Boston College; Ira Yeung, University of British Columbia

Key Findings: The authors analyze the consequences of increased regulatory transparency on banks by examining the effects of the SEC’s 2004 decision to begin publicly disclosing its comment letters, letters only issued to public banks. They find that, compared with private banks, public banks improve the timeliness of their loan loss provisions following this decision. The differences in private and public banks’ lending activities are mixed. Increased transparency leads to slower and more procyclical loan growth for public banks; it also encourages public banks to shift credit toward safer borrowers. The public dissemination of comment letters leads to an increase in funding costs and less regulatory forbearance for the public banks receiving them.

The Social Externalities of Bank Disclosure Regulation: Evidence from the Community Reinvestment Act

Authors: Oktay Urcan, University of Illinois ; Sydney Kim, University of Illinois at Urbana Champaign; Hayoung Yoon, Southern Methodist University

Key Findings: The authors assess the effects of bank disclosure regulations on business activities through an examination of the 2005 reform of the Community Reinvestment Act (CRA), which lifted mandatory disclosure of geographic loan distribution data for certain banks. They found that the disclosure reform led to declines in small business growth, small business employment and wages in low- and moderate-income (LMI) neighborhoods. Using hand-collected data, they also show that non-disclosing banks reduced lending to LMI areas after the reform. Their findings suggest that eliminating disclosure leads to negative externalities for the communities the CRA specifically targets to protect.

Sentiment in Bank Examination Reports and Bank Outcomes

Authors: Cindy Vojtech, Board of Governors of the Federal Reserve System; Maureen Cowhey, Board of Governors of the Federal Reserve System; Jung Lee, Board of Governors of the Federal Reserve System; Thomas Spiller, Board of Governors of the Federal Reserve System

Key Findings: Does the bank examination process provide useful insight into the future outcome of banks? The authors investigate this question by analyzing the text of commercial bank examination reports for small to mid-sized banks over the 2004 to 2016 period. They find that controlling for a variety of factors—including the CAMELS component ratings themselves—the sentiment supervisors express in describing most of the components predict relevant future outcomes. The sentiment conveyed in the asset quality, management, and earnings sections provides significant information in predicting future outcomes for problem loans, supervisory actions, and profitability, respectively.

Q&A Session

Moderator Response