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Are small rural banks vulnerable to local economic downturns?

Author

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  • Andrew P. Meyer
  • Timothy J. Yeager

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.

Suggested Citation

  • Andrew P. Meyer & Timothy J. Yeager, 2001. "Are small rural banks vulnerable to local economic downturns?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 25-38.
  • Handle: RePEc:fip:fedlrv:y:2001:i:mar:p:25-38:n:v.83no.2
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    References listed on IDEAS

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