2023 Community Banking Research Conference

Research Papers, Authors and Key Findings

Research Paper Session 1
Interest Rate Risk and Depositor Runs

Dynamic Deposits: The Role of Inflows on Future Outflows

Authors: Michael Gelman, University of Delaware; Andrew McKinlay, Virginia Tech

Key Findings: Deposit inflows into the banking system are typically considered beneficial. The authors show, however, that deposit inflows can also lead to negative consequences. Banks that exhibit deposit inflows become riskier by increasing both interest rate risk and credit risk. In periods of monetary tightening, these banks face greater losses, and the more constrained ones experience uninsured deposit outflows. High deposit inflows can serve as an early indicator for understanding changes in bank risk and future deposit outflows (and even future runs on the bank). This information can assist depositors, bankers, stakeholders and policymakers.

Banks' Motivations for Designating Securities as Held to Maturity

Authors: Seil Kim, Baruch College; Sehwa Kim, Columbia University; Stephen Ryan, New York University

Key Findings: The authors provide evidence that banks classify securities as held to maturity (HTM) rather than available for sale when the HTM classification provides preferred financial accounting and regulatory capital treatments, and not because they have a distinct economically motivated intent and ability to hold the securities to maturity. The authors examine the treatment of securities by five banks in periods with and without the regulatory accumulated other comprehensive income (AOCI) filter and conclude that their findings provide support for recent calls to eliminate the HTM category and AOCI filter.

Social Media as a Bank Run Catalyst

Authors: Anthony Cookson, University of Colorado at Boulder; Corbin Fox, James Madison University; Javier Gil-Bazo, Universitat Pompeu Fabra; Juan Filipe Imbet, Université Paris Dauphine; Christoph Schiller, Arizona State

Key Findings: Social media no doubt played a role in the run on Silicon Valley Bank, and the effects were felt broadly in the U.S. banking system. The authors use comprehensive Twitter data to show that preexisting exposure to social media predicts bank stock market losses in the run period, even after controlling for bank characteristics related to run risk. Tweets authored by members of the tech startup community (who are likely depositors) and that contain keywords related to contagion produce even stronger effects. The authors’ results are consistent with depositors using Twitter to communicate in real time during a bank run.

Research Paper Session 2
Banking Sector Resilience to Extreme Weather Events

Extreme Wildfires, Distant Air Pollution, and Household Financial Health

Authors: Xudong (Sean) An, Federal Reserve Bank of Philadelphia; Stuart Gabriel, UCLA; Nitzan Tzur-Ilan, Federal Reserve Bank of Dallas

Key Findings: The authors evaluate the impact of extreme U.S. wildfires and related smoke and air pollution events on household mobility, housing and financial outcomes. They focus on extreme wildfires over the 2016-2020 period and use the variation in fire, smoke and pollution incidence within and beyond treatment areas to assess event outcomes. They find significantly heightened credit distress among households that experienced the most destructive wildfires, as well as sizable house price declines and net outmigration from fire zones. More distant wildfire-related smoke and air pollution resulted in elevated credit card spending, indebtedness and delinquency.

Natural Disasters, Local Bank Market Share, and Economic Recovery

Authors: Justin Gallagher, Montana State University; Daniel Hartley, Federal Reserve Bank of Chicago

Key Findings: Economic theory suggests that community banks may have a greater incentive, but a lower capacity, to lend to a region following a destructive event such as a natural disaster. The authors test whether regions with more local banking at the time of a natural disaster have greater post-disaster lending, and, therefore, more rapid regional redevelopment characterized by higher employment and wages and greater population growth. They find a small reduction in lending in the years immediately following a large disaster. The reduction in new lending is driven by regions with more local banking at the time of a large disaster. These same regions exhibit lower wage, employment and population levels post-disaster as compared to regions with less local banking at the time of the disaster.

As Dry as a Bone: How do Banks Cope with Droughts?

Authors: Oskar Kowalewski, IESEG School of Management ; Michael Brei, University of Lille; Piotr Spiewanowski, Polish Academy of Sciences; Eric Strobl, University of Bern

Key Findings: The authors examine adaptation to climate change at U.S. banks over the period 2000-2019. They find that local banks reduce lending to small firms and the agriculture sector during drought periods, while increasing lending to households at the same time. They also find that local banks are more likely to increase liquidity during drought periods. Their results indicate that local banks react more strongly to drought than do large banks. They also show that the introduction of government financial assistance to drought-affected areas changed the lending and deposit behavior of banks and mitigated the negative consequences.

Research Paper Session 3
Assessing Credit Risk

Internal Loan Ratings, Supervision, and Procyclical Leverage

Authors: Stephen Karolyi, Office of the Comptroller of the Currency (OCC); Lewis Gaul, Office of the Comptroller of the Currency; Pinar Uysal, Board of Governors of the Federal Reserve System

Key Findings: The authors build a model of banks’ internal loan ratings and find evidence of systemic downward drift in ratings, consistent with initial ratings inflation. They also examine the causal impact of loan-level supervision on ratings and find not only that supervision reduces ratings inflation, but also that these effects spill over within a bank’s loan portfolio, consistent with a learning channel. They use their model to construct counterfactual capital ratios for banks based on a variety of scenarios, including an expansion of bank supervision. Their findings provide insight into the debate about the role of supervision in bank capital cyclicality.

Regulatory Risk Perception and Small Business Lending

Authors: Siddharth Vij, University of Georgia; Joseph Kalmenovitz, University of Rochester

Key Findings: Using Small Business Administration (SBA) data, the authors examine how the perception of risk by regulators affects the ability of small businesses to obtain access to credit. They find that SBA loans and job creation are reduced at the new location when SBA employees transfer from offices with more current defaults on SBA loans. This effect is independent of local economic
conditions and the informational content of the nonlocal defaults. They conclude that misperception of economic conditions by regulators has a measurable effect on access to credit.

Can Credit Rating Affect Credit Risk? Causal Evidence from an Online Lending Marketplace

Authors: Alexander Wirth, University of Michigan; Amiyatosh Purnanandam, Ross School of Business, University of Michigan

Key Findings: The authors pose the following question: Although it is known that a credit rating is determined by a borrower’s credit risk, can the rating itself change a borrower’s credit risk in an economically meaningful manner? The data needed to answer this question are hard to obtain, but the authors take advantage of a March 2020 regulatory change that provides a credibly exogenous variation in the credit rating of borrowers with similar risk to show that individuals with a negative shock experienced an average decline of 16 points in their FICO scores, followed by a default rate that was 23 percentage points higher the next year. Their findings suggest that empirical studies linking credit ratings to real outcomes should carefully consider the endogenous effect of ratings on future outcomes.