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Do bank mergers reduce lending to businesses and farmers? New evidence from Tenth District states

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  • William R. Keeton

Abstract

The banking industry has undergone substantial consolidation during the last 15 years, and that process has accelerated in the 1990s. One effect of this consolidation has been to greatly reduce the number of independent and locally owned banks. Some banks have been acquired by distant banking organizations, and some have been acquired by banking companies that were nearby but very large, causing the banks to become junior partners in the new organization.> Since independent and locally owned banks have been important sources of funds for local businesses and farmers, concern has arisen that such borrowers will now find it harder to obtain credit. In principle, the extra safety and liquidity that newly acquired banks enjoy from belonging to a larger, more diversified banking organization could enable the banks to lend more to local farms and businesses. But some analysts worry that banks acquired by large or distant organizations will lend less to local borrowers because the parent company cannot make credit decisions as efficiently or has other preferred uses for the banks' funds.> Is this concern warranted? Keeton finds that recent bank mergers in Tenth District states provide partial support for the claim that banks acquired by large or distant organizations reduce lending to local farms and businesses.

Suggested Citation

  • William R. Keeton, 1996. "Do bank mergers reduce lending to businesses and farmers? New evidence from Tenth District states," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 63-75.
  • Handle: RePEc:fip:fedker:y:1996:i:qiii:p:63-75:n:v.81no.3
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    References listed on IDEAS

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    1. Donald M. Brown, 1983. "Bank holding company performance studies and the public interest: normative uses for positive analysis," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 26-34.
    2. Kenneth Spong & John D. Shoenhair, 1992. "Performance of banks acquired on an interstate basis," Financial Industry Perspectives, Federal Reserve Bank of Kansas City, issue Dec, pages 15-32.
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    Cited by:

    1. Berger, Allen N. & Klapper, Leora F. & Udell, Gregory F., 2001. "The ability of banks to lend to informationally opaque small businesses," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2127-2167, December.
    2. Mark Drabenstott & Larry G. Meeker, 1997. "Financing rural America : a conference summary," Proceedings – Rural and Agricultural Conferences, Federal Reserve Bank of Kansas City, issue Apr, pages 1-10.
    3. Berger, Allen N. & Saunders, Anthony & Scalise, Joseph M. & Udell, Gregory F., 1998. "The effects of bank mergers and acquisitions on small business lending," Journal of Financial Economics, Elsevier, vol. 50(2), pages 187-229, November.
    4. Goldberg, Lawrence G. & White, Lawrence J., 1998. "De novo banks and lending to small businesses: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 851-867, August.
    5. Ahrendsen, Bruce L. & Dixon, Bruce L. & Luo, Bing, 2003. "The Effects Of Bank Mergers On Commercial Bank Agricultural Lending," 2003 Annual meeting, July 27-30, Montreal, Canada 22051, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Pietro Alessandrini & Manuela Croci & Alberto Zazzaro, 2005. "The geography of banking power: role of function distance," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 58(235), pages 129-167.
    7. Loretta J. Mester, 1999. "Banking industry's consolidation: what's a small business to do?," Business Review, Federal Reserve Bank of Philadelphia, issue Jan, pages 3-16.
    8. Richards, Timothy J. & Acharya, Ram N. & Kagan, Albert, 2008. "Spatial competition and market power in banking," Journal of Economics and Business, Elsevier, pages 436-454.
    9. De Haas, Ralph & Ferreira, Daniel & Taci, Anita, 2010. "What determines the composition of banks' loan portfolios? Evidence from transition countries," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 388-398, February.
    10. De Haas, Ralph & Naaborg, Ilko, 2006. "Foreign banks in transition countries. To whom do they lend and how are they financed?," MPRA Paper 6320, University Library of Munich, Germany.
    11. Franklin Allen & James McAndrews & Philip Strahan, 2002. "E-Finance: An Introduction," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(1), pages 5-27, August.
    12. Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 135-194, February.
    13. Marvin R. Duncan, 1997. "Keynote address : where are rural capital markets headed?," Proceedings – Rural and Agricultural Conferences, Federal Reserve Bank of Kansas City, issue Apr, pages 11-45.
    14. De Haas, Ralph & Ferreira, Daniel & Taci, Anita, 2007. "What determines banks’ customer choice? Evidence from transition countries," MPRA Paper 6319, University Library of Munich, Germany.
    15. Nicola Cetorelli & Philip E. Strahan, 2006. "Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets," Journal of Finance, American Finance Association, vol. 61(1), pages 437-461, February.
    16. Degryse, Hans & Van Cayseele, Patrick, 2000. "Relationship Lending within a Bank-Based System: Evidence from European Small Business Data," Journal of Financial Intermediation, Elsevier, pages 90-109.
    17. Ricardo Correa, 2008. "Bank integration and financial constraints: evidence from U.S. firms," International Finance Discussion Papers 925, Board of Governors of the Federal Reserve System (U.S.).
    18. Ralph de Haas & Ilko Naaborg, 2005. "Foreign Banks in Transition Economies: Small Business Lending and Internal Capital Markets," International Finance 0504004, EconWPA.
    19. R. Alton Gilbert, 2000. "Nationwide branch banking and the presence of large banks in rural areas," Review, Federal Reserve Bank of St. Louis, issue May, pages 13-28.
    20. Sykuta, Michael E. & Klein, Peter G. & James, Harvey S., Jr., 2005. "Markets, Contracts, or Integration? The Adoption, Diffusion, and Evolution of Organizational Form," 2005 Annual meeting, July 24-27, Providence, RI 19390, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    21. Houston, Joel F. & James, Christopher, 1998. "Do bank internal capital markets promote lending?," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 899-918, August.

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