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Are small rural banks vulnerable to local economic downturns?

  • Andrew P. Meyer
  • Timothy J. Yeager
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    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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    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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    1. 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.
    2. Gary C. Zimmerman, 1996. "Factors influencing community bank performance in California," Economic Review, Federal Reserve Bank of San Francisco, pages 26-40.
    3. Allen N. Berger & Anthony Saunders & Joseph M. Scalise & Gregory F. Udell, 1997. "The effects of bank mergers and acquisitions on small business lending," Proceedings 549, Federal Reserve Bank of Chicago.
    4. 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.
    5. Mitchell A. Petersen & Raghuram G. Rajan, 2000. "Does Distance Still Matter? The Information Revolution in Small Business Lending," NBER Working Papers 7685, National Bureau of Economic Research, Inc.
    6. Mitchell A. Petersen, 2000. "Does distance still matter? the information revolution in small business lending?," Proceedings 679, Federal Reserve Bank of Chicago.
    7. 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.
    8. 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.
    9. 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.
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