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Community bank performance in the presence of county economic shocks

  • Timothy J. Yeager
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    A potentially troubling characteristic of the U.S. banking industry is the geographic concentration of many community banks* offices and operations. If geographic concentration of operations exposes banks to local market risk, we should observe a widespread decline in their financial performance following adverse economic shocks. By analyzing the performance of a sample of geographically concentrated U.S. community banks exposed to severe unemployment shocks in the 1990s, we find that banks are not particularly sensitive to local economic deterioration. Indeed, performance at banks in counties that suffered economic shocks is not statistically different from performance at banks that did not suffer economic shocks. These findings suggest that an additional supervisory tax such as higher capital requirements on banks with geographically concentrated operations is unwarranted. They also suggest that such banks are unlikely to reduce risk significantly through geographic expansion. Finally, bank supervisors should not rely systematically on county-level labor data to forecast or even to explain contemporaneous community bank performance. Rising county-level unemployment rates are consistent with both healthy and deteriorating bank performance.

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    Paper provided by Federal Reserve Bank of St. Louis in its series Supervisory Policy Analysis Working Papers with number 2002-11.

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    Date of creation: 2002
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    Handle: RePEc:fip:fedlsp:2002-11
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    1. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
    2. 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.
    3. 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.
    4. 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.
    5. Mitchell A. Petersen, 2000. "Does distance still matter? the information revolution in small business lending?," Proceedings 679, Federal Reserve Bank of Chicago.
    6. 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.
    7. Jeffery W. Gunther & Kenneth J. Robinson, 1999. "Industry mix and lending environment variability: what does the average bank face," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 24-31.
    8. William R. Emmons & R. Alton Gilbert & Timothy J. Yeager, 2001. "The importance of scale economies and geographic diversification in community bank mergers," Working Papers 2001-024, Federal Reserve Bank of St. Louis.
    9. Michelle Clark Neely & David C. Wheelock, 1997. "Why does bank performance vary across states?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 27-40.
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