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Federal Home Loan Bank lending to community banks: are targeted subsidies necessary?

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  • Ben R. Craig
  • James B. Thomson

Abstract

The Gramm-Leach-Bliley Act of 1999 extended the lending authority of Federal Home Loan Banks to include advances secured by small-enterprise loans of community financial institutions. The authors examine three possible reasons for the extension of this selective credit subsidy to community banks and thrifts, including the need to subsidize community depository institutions, stabilize the Federal Home Loan Banks, and address a market failure for small enterprise loans in rural banking markets. They use two empirical models to investigate whether funding constraints affect small-business lending decisions by rural community banks. The results reject the hypothesis that access to increased funds will increase the amount of small-business loans made by community banks.

Suggested Citation

  • Ben R. Craig & James B. Thomson, 2001. "Federal Home Loan Bank lending to community banks: are targeted subsidies necessary?," Working Paper 0112, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:0112
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    References listed on IDEAS

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    2. Allen N. Berger & Gregory F. Udell, 1998. "The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle," Finance and Economics Discussion Series 1998-15, Board of Governors of the Federal Reserve System (U.S.).
    3. Kane, Edward J, 1977. "Good Intentions and Unintended Evil: The Case against Selective Credit Allocation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 55-69, February.
    4. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, April.
    5. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
    6. Thakor, Anjan V., 2000. "Relationship Banking," Journal of Financial Intermediation, Elsevier, pages 3-5.
    7. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January.
    8. James Harrigan & Egon Zakrajsek, 2000. "Factor Supplies and Specialization in the World Economy," NBER Working Papers 7848, National Bureau of Economic Research, Inc.
    9. William P. Osterberg & James B. Thomson, 1999. "Banking consolidation and correspondent banking," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 9-20.
    10. David Neumark & Steven A. Sharpe, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, Oxford University Press, pages 657-680.
    11. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    12. Edward Kane, 1999. "Housing Finance GSEs: Who Gets the Subsidy?," Journal of Financial Services Research, Springer;Western Finance Association, pages 197-209.
    13. Flannery, Mark J., 1989. "Capital regulation and insured banks choice of individual loan default risks," Journal of Monetary Economics, Elsevier, pages 235-258.
    14. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
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    Citations

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    Cited by:

    1. Ben R. Craig & William E. Jackson, III & James B. Thomson, 2007. "Does government intervention in the small-firm credit market help economic performance?," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Aug.
    2. Ben Craig & James Thomson, 2003. "Federal Home Loan Bank Lending to Community Banks: Are Targeted Subsidies Desirable?," Journal of Financial Services Research, Springer;Western Finance Association, pages 5-28.
    3. Ben R. Craig & William E. Jackson & James B. Thomson, 2004. "On SBA-guaranteed lending and economic growth," Working Paper 0403, Federal Reserve Bank of Cleveland.
    4. Ben R. Craig & William E. Jackson & James B. Thomson, 2005. "SBA-loan guarantees and local economic growth," Working Paper 0503, Federal Reserve Bank of Cleveland.
    5. Ben R. Craig & William E. Jackson & James B. Thomson, 2006. "Small firm credit market discrimination, SBA-guaranteed lending, and local market economic performance," Working Paper 0613, Federal Reserve Bank of Cleveland.
    6. William E.Jackson, III & Ben R. Craig & James B. Thompson, 2006. "Does Small Business Administration guaranteed lending improve economic performance in low–income areas?," Proceedings: Community Affairs Dept. Conferences, Federal Reserve Bank of Kansas City, pages 55-85.
    7. Ben R. Craig & William E. Jackson & James B. Thomson, 2006. "Small-firm credit markets, SBA-guaranteed lending, and economic performance in low-income areas," Working Paper 0601, Federal Reserve Bank of Cleveland.

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    Keywords

    Small business ; Federal home loan banks;

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