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Are small rural banks vulnerable to local economic downturns?

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  • Andrew P. Meyer
  • Timothy J. Yeager
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    Abstract

    A potentially troubling characteristic of the U.S. banking industry is the geographic concentration of many banks’ offices and operations. Historically, banking laws have prevented U.S. banks from branching into other counties and states. A potential adverse consequence of these regulations was to leave banks—especially small rural banks—vulnerable to local economic downturns. If geographic concentration of bank offices leaves banks vulnerable to local economic downturns, we should observe a significant correlation between bank performance and the local economy. Looking at Eighth District banks, however, we find little connection between the dispersion of a bank’s offices and its ability to insulate itself from localized economic shocks. County-level economic data are weakly correlated with bank performance. Two policy implications follow from this finding. First, a priori, little justification exists for imposing more stringent regulatory requirements on banks with geographically concentrated operations than on other banks. Second, county-level labor and income data do not appear to be systematically useful in the bank supervision process.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of St. Louis in its journal Review.

    Volume (Year): (2001)
    Issue (Month): Mar ()
    Pages: 25-38

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    Handle: RePEc:fip:fedlrv:y:2001:i:mar:p:25-38:n:v.83no.2

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    Related research

    Keywords: Rural areas ; Banks and banking ; Economic conditions - United States;

    References

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    1. Mitchell A. Petersen, 2000. "Does distance still matter? the information revolution in small business lending?," Proceedings 679, Federal Reserve Bank of Chicago.
    2. Jith Jayaratne & Philip E. Strahan, 1997. "The benefits of branching deregulation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 13-29.
    3. Allen N. Berger & Anil K. Kashyap & Joseph M. Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trips It's Been," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 55-218.
    4. Allen N. Berger & Anthony Saunders & Joseph M. Scalise & Gregory F. Udell, 1997. "The Effects of Bank Mergers and Acquisitions on Small Business Lending," New York University, Leonard N. Stern School Finance Department Working Paper Seires 97-1, New York University, Leonard N. Stern School of Business-.
    5. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
    6. Kevin L. Kliesen & R. Alton Gilbert, 1996. "Are some agricultural banks too agricultural?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 23-36.
    7. Gary C. Zimmerman, 1996. "Factors influencing community bank performance in California," Economic Review, Federal Reserve Bank of San Francisco, pages 26-40.
    8. Liang, Nellie & Rhoades, Stephen A., 1988. "Geographic diversification and risk in banking," Journal of Economics and Business, Elsevier, vol. 40(4), pages 271-284, November.
    9. Elizabeth S. Laderman & Ronald H. Schmidt & Gary C. Zimmerman, 1991. "Location, branching, and bank portfolio diversification: the case of agricultural lending," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 24-38.
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