Federal Reserve System and the Conference of State Bank Supervisors
Community Banking in the 21st Century
October 2, 2013, Federal Reserve Bank of St. Louis
Welcome & Overview of the Fed/CSBS Community Bank Research Conference Initiative
- Moderator: Julie Stackhouse, Welcome & Overview of the Fed/CSBS Community Bank Research Conference Initiative | Video
- John Ryan, president and CEO, Conference of State Bank Supervisors PDF | Video
- James Bullard, president, Federal Reserve Bank of St. Louis PDF | Video
- Ben Bernanke, chairman, Federal Reserve PDF | Video
Research Session 1: The Role of Community Banks
Moderator: Scott E. Hein, Robert C. Brown Chair in Finance, Rawls College of Business, Texas Tech University, Lubbock, Texas. | Video
- Do Community Banks Play a Role in New Firm Survival? Yan Y. Lee, Smith Williams Federal Deposit Insurance Corporation Paper (PDF) | Presentation Slides (PDF) | Video | ABSTRACT: In the United States, net job creation is largely a story of new and young firms (Neumark, Wall and Zhang 2008; Haltiwanger, Jarmin and Miranda 2010; and Kane 2010). New firms create more new jobs each year than any other firm age group. Kane (2010) estimates that new firms generate at least four times the average annual number of jobs created by any other age group. Start-up firms also have higher rates of employment growth in their early years than do older firms, conditional on survival (Haltiwanger Jarmin, and Miranda 2010). However, many new firms, and their associated jobs, do not survive more than a few years. Haltiwanger, Jarmin and Miranda estimate that firm deaths eliminate 40 percent of the jobs created by start-ups within the first five years. These authors interpret the high rates of job creation and destruction by new firms as evidence of an up-or-out dynamic—a new firm either grows or dies. This study explores whether community banks play a role in increasing a new firms’ access to capital and, consequently, start-ups’ chances of survival.
- Equipment Lease Financing: The Role of Community Banks Charles Kelly, Mohammed Khayum, Curtis Price Romain College of Business, University of Southern Indiana Paper (PDF) | Presentation Slides (PDF) | Video (Kelly) | Video (Khayum) | ABSTRACT: Recent analyses of U.S. community banking indicate the existence of cross-sectional and time series variation in performance, business models and strategic directions among community banks (FDIC, 2012; Gilbert et al. 2013). While consolidation within the U.S. commercial banking sector over the last quarter century has resulted in a declining number of community banks, these banks continue to play a vital role in the national economy, particularly with respect to small businesses and rural communities. Community banks provide 46 percent of small loans to farms and businesses, 16.1 percent of residential mortgage lending, 65.8 percent of farm lending and 34.5 percent of commercial real estate loans, while accounting for 19.4 percent of all retail deposits at U.S. banks as of 2011 (FDIC, 2012). At the same time, evidence of sharp declines in the community banks’ share of mortgage and consumer loans, low profitability indicators, and the continued incidence of community bank failures raises concerns about the future viability of community banking.
- Small Business Lending and Social Capital: Are Rural Relationships Different? Robert DeYoung, University of Kansas; Dennis Glennon, Office of the Comptroller of the Currency; Peter Nigro, Bryant University, Smithfield, RI; Kenneth Spong, Federal Reserve Bank of Kansas City Paper (PDF) | Presentation Slides (PDF) | Video | ABSTRACT: Rural communities often are described as places where “everyone knows each other’s business.” Such intracommunity information is likely to translate into a stock “social capital” that supports well-informed financial transactions (Guiso, Sapienza and Zingales 2004). We investigate whether and how the “ruralness” of small banks and small-business borrowers influences loan-default rates, using data on more than 18,000 U.S. Small Business Administration loans originated and held by rural and urban community banks between 1984 and 2001. These data provide a good test of the value of soft information and lending relationships because (a) these borrowers tend to be smaller, younger and more credit-challenged than other small businesses and (b) these loans were originated largely before the advent of small business credit scoring and securitization, hence they were held in portfolio and put some bank capital directly at risk. We have two main findings. First, loans originated by rural community banks and/or loans borrowed by rural businesses default substantially less often than loans made by urban banks and/or in urban areas. Second, loan-default rates are significantly higher when borrowers are located outside the geographic market of their lenders, even after accounting for the physical distance between the bank and the small business. Thus, we conclude that loan defaults are lower in communities arguably expected to have large amounts of inexpensive soft information and at banks likely to have a high level of personal knowledge about their customers. Our findings offer an explanation for why community banks—and in particular, rural banks—continue to exist despite operating at such a small scale; why small local banks play a critical role in lending to small, informationally opaque borrowers; and why small rural banks are less likely to use small business credit scoring than their small urban counterparts. Moreover, our findings are consistent with the idea that a high stock of social capital is conducive to financial activity and development.
- Bank Failure, Relationship Lending and Local Economic Performance John Kandrac, Federal Reserve Board of Governors Paper (PDF) | Presentation Slides (PDF) | Video | ABSTRACT: Whether bank failures have adverse effects on local economies is an important question for which there is scarce and conflicting evidence. In this study, I use county-level data to examine the effect of bank failures and resolutions on local economies. Using quasi-experimental techniques, as well as cross-sectional variation in bank failures, I show that recent bank failures were followed by significantly lower income and compensation growth, higher poverty rates, and lower employment. Additionally, I find that the structure of bank resolution appears to be important. Resolutions that include loss-sharing agreements tend to be less deleterious to local economies, supporting the notion that the importance of bank failure to local economies stems from banking and credit relationships. Finally, I show that markets with more interbank competition are more strongly affected by bank failure.
Evening Keynote Address
- Dorothy A. Savarese, chairman, president and CEO of Cape Cod Five Cents Savings Bank, Orleans, Mass. Remarks (PDF) | Video
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