Are rural banks facing increased funding pressures? : evidence from Tenth District states

During the last several years, concern has increased that changes in the financial system have made it harder for rural banks to attract enough deposits to meet local credit demands. While urban banks may face some of the same problems, it is widely believed that funding pressures have increased more for rural banks than for urban banks. In response, bank trade groups and rural development officials have proposed new measures to expand rural banks' access to loanable funds.> Three factors have led to the increased concern about the ability of rural banks to fund their loans. Firs, loan-deposit ratios have risen sharply, reaching record highs in the last two years. Second, rural deposit growth has been sluggish. Third, increasing numbers of rural banks have been taken over by urban banks and converted to branches.> Keeton examines recent loan and deposit trends in Tenth District states to see what evidence exists for each of the three sources of concern about rural funding pressures and to see if the concerns are more justified for rural banks than urban banks. Overall, the evidence indicates that sluggish deposit growth has increased funding pressures at rural banks but not any more than at urban banks of the same size. In short, increased funding pressures appear to be a small-bank problem rather than just a rural problem. This finding is tempered, however, by two important caveats. First, funding pressures could become more severe at rural banks than urban banks if rural investors begin investing as much of their wealth in mutual funds as urban investors do. Second, small-bank funding pressures are likely to have a bigger impact on rural borrowers because small businesses in rural areas are more dependent on small banks for loans.