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