Community Banking Conference Spotlights Research on Lending

This post is part of a series titled “Supervising Our Nation’s Financial Institutions.”

After a two-year COVID-19 pandemic pause on in-person participation, this year’s Community Banking Research Conference returned to the St. Louis Fed in September. The annual conference—sponsored by the Federal Reserve, the Conference of State Bank Supervisors (CSBS) and the Federal Deposit Insurance Corp. (FDIC), and hosted by the St. Louis Fed—spotlights emerging research on issues important to the community banking industry and features keynotes by leading community bankers and regulators.

This year’s conference featured 11 papers, several keynote addresses and highlights from the 2022 CSBS National Survey of Community Banks (PDF). The conference also included a presentation from the James Madison University student team who won this year’s CSBS Case Study Competition.

Presentations for these papers were recorded and are available on the conference website. More than 500 academics, bankers and regulators participated in person or virtually.

Information, Please

The conference’s first session examined the role of information in bank lending. This topic is of particular importance to community bankers, who often specialize in the type of lending that relies on soft information, such as the length of the lending relationship or the perceived trustworthiness of the borrower.

In “Bank Monitoring with On-Site Inspections” (PDF), authors Amanda Heitz of Tulane University and Alex Ufier and Chris Martin of the FDIC used a database of nearly 30,000 multiple-draw construction loans to see how often banks monitor these loans. They show that banks trade off monitoring with more favorable loan origination terms, and that monitoring is less frequent for loans where the bank has a prior relationship with the borrower. They demonstrate that more monitoring ultimately decreases loan default.

The second paper, “Bank Loan Markups and Adverse Selection” (PDF), examined market power in local U.S. corporate loan markets. Authors Mehdi Beyhaghi of the Federal Reserve Bank of Richmond, Cesare Fracassi of the University of Texas at Austin and Gregory Weitzner of McGill University found that—contrary to most theories of competition—loan markups are actually higher in regions in which more banks operate. This result is driven by asymmetric information across banks, which is exacerbated as the number of banks increase. As moderator Mark Flannery of the University of Florida put it, the more competitors there are, the more opportunities there are for negative information about the borrower to be known to at least one of them, thus amplifying the “winner’s curse” for the lender who ultimately makes the loan. Their findings suggest that adverse selection is an important driver of market power in local bank markets and has implications for antitrust policy. This paper received the annual award for the top academic paper presented at the conference.

In “Non-Information Asymmetry Benefits of Relationship Lending” (PDF), author Daniel Rabetti of Tel Aviv University looked at the benefits of relationship lending in the Paycheck Protection Program (PPP). He found that firms that get loans from lenders with whom they have a prior relationship receive larger loans and faster approvals than firms that don’t have those relationships. This benefit for borrowers comes with costs, however, as he demonstrates that firms are more likely to violate the program’s rules when a relationship exists.

Ten Years and Going Strong

This year marked the 10th anniversary of the conference, and once again the papers presented were timely and informative. The second session featured papers concerning minorities’ access to credit and session three focused on transparency in supervision and regulation.

Two additional papers were presented on video—one examined the age gap in access to mortgages and the other looked at the procyclical effects of FDIC insurance premiums. We invite you to take a look at them—on video or paper—and the other conference presentations on our conference website, communitybanking.org.