The consolidation of the U.S. banking industry has greatly increased the importance of large multi-market banking organizations relative to smaller, single-market banks. An issue that has not received much attention is how multi-market banking has affected the response of local bank lending to local economic shocks. When an area is hit particularly hard by a recession, is bank lending now more likely to decline in the area, exacerbating the downturn? Or is bank lending now more likely to remain unchanged, moderating the downturn? The answer is important to local communities because it affects the volatility of their output and employment. But it is also important to the national economy, because the distribution of credit across markets can affect overall productivity and growth. ; Keeton uses new data to examine the impact on local lending of the slowdowns in some local economies during the 2001 recession and recovery. The basic approach is to see whether these slowdowns had a different effect on lending by single-market banks than on lending by multi-market banks. He finds substantial support for the view that the shift to multi-market banking has reduced the overall sensitivity of bank lending to local economic shocks. He also finds some evidence that this effect may be due to a lesser ability of multi-market banks to identify and respond to changes in local economic conditions.
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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.