Research Papers, Authors and Key Findings
Research Paper Session 1
Community Banks and the Local Economy
Unexpected Gains: How Fewer Community Banks Boost Local Investment and Economic Development
Authors: Rohan Williamson, Georgetown University ; Bernadette Minton, Ohio State University; Alvaro Taboada, Mississippi State University
Key Findings: The authors examine the impact of the decline in the number of community banks on community investment and development. Counterintuitively, they find that a decrease in community banks leads to an increase in community investment, a finding that is partially driven by the increased lending activity of other community banks. They observe that this counterintuitive result depends on a large presence of community banks in the examined county and is greater when the acquirer of the lost bank is a community bank rather than a large bank. In general, the evidence indicates that community bank consolidations create larger and stronger institutions that increase community development.
Canary in the Coal Mine: Bank Liquidity Shortages and Local Economic Activity
Authors: Shohini Kundu, UCLA; Rajkamal Iyer, Imperial College ; Nikos Paltalidis, Durham University Business School
Key Findings: The authors present a novel real-time measure for assessing the build up of regional economic and financial risks, using the relationship between regional economic activity and deposit growth in local banks. Facing a liquidity shortage and a persistent economic slowdown, banks may increase their deposit rates to attract additional deposits. The authors find that when regional banks operating within a county increase their deposit rates, it is associated with a slowdown in economic activity in that region up to two years ahead. They note that deposit rates have a number of advantages over other predictors: they are readily available in real time, forward-looking and available at a more granular level.
Relationship Lending: That Ship Has Not Sailed for Community Banks
Authors: Dmytro Holod, State University of New York at Stony Brook; Joe Peek, Federal Reserve Bank of Boston; Gokan Torna, Stony Brook University
Key Findings: The authors examine whether, or to what degree, relationship lending enhances the value of a banking organization and thus its viability. Using call report data, they find that small commercial and industrial (C&I) loans add value to community banks both in absolute terms and relative to the value contributed by larger C&I loans. The value creation emanates from the smallest relationship-based C&I loans, those with original values of $100,000 or less, and at the smallest community banks. Small commercial real estate loans, on the other hand, do not contribute additional value to community banks, likely because of their transactional nature.
Research Session One Videos and Academic Moderator Slides
Research Paper Session 2
Deposit Stability
Variable Deposit Betas and Bank Interest Rate Risk Exposure
Authors: Mustafa Emin, University of Alabama; Christopher James, University of Florida; Tao Li, University of Florida
Key Findings: Whether maturity transformation exposes banks to interest rate risk depends in part on the effectiveness of bank deposits as a hedge against interest rate shocks. The authors provide evidence that deposit betas vary significantly with interest rates, and that variations in deposit betas are significantly related to the variations in the interest rate sensitivity of bank stock returns. The dynamic nature of deposit betas indicates that banks’ interest rate risk exposure can increase substantially when interest rates increase sharply, even for banks that, prior to the interest rate hike, appeared well-hedged against interest rate increases.
The Economics of Market-Based Deposit Insurance
Authors: Edward Kim, University of Michigan-Ann Arbor; Shohini Kundu, UCLA; Amiyatosh Purnanandam, Ross School of Business, University of Michigan
Key Findings: The authors examine the financial stability implications of deposit insurance using a recent financial innovation that has emerged as an important source of funding for U.S. banks: reciprocal deposits. They show that the enhanced insurance coverage resulting from participation in a reciprocal deposit network allowed these banks to retain deposits following the 2023 banking crisis. Further, network banks pay lower interest rates on their deposits, indicating depositors are willing to trade off return for higher insurance access. This enhanced coverage also has implications for competition and risk-taking, as the authors find evidence that network banks grow larger and increase their exposure to interest rate risk.
Depositor Characteristics and Deposit Stability
Authors: Rajesh Narayanan, Louisiana State University; Dimuthu Ratnadiwakara, Louisiana State University
Key Findings: The authors study the role that the characteristics of a bank’s depositor base play in shaping its deposit franchise value and its ability to navigate interest rate risk. They use novel cell-phone geolocation data to document considerable heterogeneity across banks in the demographic and financial profiles of their depositor bases. Their findings suggest that banks with more financially sophisticated depositors exhibit higher deposit betas and experience greater deposit outflows in response to rising interest rates, thus reducing their deposit franchise values compared to their counterparts with less sophisticated depositor bases. This result has negative implications for profitability when interest rates rise.
Research Session Two Videos and Moderator Slides
Research Paper Session 3
Consumer Protection
Do Financial Consumers Discipline Bad Lenders? The Role of Disclosure Awareness
Authors: Cheng "Cathy" Zhang, University of Florida; Mark Flannery, University of Florida Warrington College of Business ; K. Philip Wang, University of Florida
Key Findings: The authors examine whether financial consumers penalize predatory lenders in the U.S. mortgage markets. Despite the existence of a website where borrowers can easily access enforcement actions by the CFPB and state regulators, borrowers do not reduce applications to sanctioned lenders or receive lower interest rates from these lenders following enforcement actions. Borrowers’ unawareness of enforcement disclosures appears to be a major factor in their inaction. Lenders who are penalized by borrowers improve service quality, while sanctioned lenders that escape borrower discipline do not, and instead, adopt company names. Their findings suggest public disclosure alone does not lead to consumer action that effectively disciplines lenders.
Disciplining Banks through Disclosure: Evidence from CFPB Consumer Complaints
Authors: Anya Kleymenova, Board of Governors of the Federal Reserve System; Jeffrey Jou, University of Pennsylvania; Andrea Passalacqua, Analysis Group Inc.; Laszlo Sandor, Consumer Financial Protection Bureau; Rajesh Vijayaraghavan, University of British Columbia, Columbia Sauder School of Business, Vancouver
Key Findings: The authors examine whether the disclosure of consumer complaints about their financial services providers is material and impacts the affected firms’ funding and provision of financial services and consumer credit. They use a novel confidential dataset from the Consumer Financial Protection Bureau (CFPB) of consumer complaints and confidential mortgage, deposit and market price data to answer these questions, finding that banks subject to prudential CFPB oversight experience a decline in their stock prices, an increase in trading volume and declines in deposit and mortgage market deposit shares. The authors evaluate the content of disclosures and their intensity and conclude that consumer complaints can serve as a disciplinary device for banks.
Branching Out Inequality: The Impact of Credit Equality Policies
Authors: Jacelly Cespedes, University of Minnesota; Erica Jiang, University of Southern California Marshall School of Business ; Carlos Parra, Pontifical Catholic University of Chile; Jinyuan Zhang, University of California Los Angeles
Key Findings: The paper examines the impact of the Community Reinvestment Act (CRA) on banks’ branching and lending decisions amid the rise of shadow banks. Their findings suggest that the CRA may potentially distort the allocation of financial services in a manner contrary to the regulation’s intended objectives. They find that while the CRA benefits underserved neighborhoods in prosperous regions, it can have adverse effects on certain economically disadvantaged areas as banks refrain from establishing branches to avoid CRA requirements. These regions experience declines in small business lending, financial inclusion and real economic activity. The existence of shadow banks exacerbates this outcome.
Research Session Three Videos