Academic journal article Economic Review (Kansas City, MO)

Has Multi-Market Banking Changed the Response of Small Business Lending to Local Economic Shocks?

Academic journal article Economic Review (Kansas City, MO)

Has Multi-Market Banking Changed the Response of Small Business Lending to Local Economic Shocks?

Article excerpt

The consolidation of the U.S. banking industry has greatly increased the importance of large multi-market banking organizations relative to smaller, single-market banks. Economists have conducted many empirical studies of the effects of this shift, including the impact on the competitiveness of banking markets, the volume of small business lending, and the safety and soundness of the banking system. An issue that has not received as much attention is how multi-market banking has affected the response of local bank lending to local economic shocks. When an area is hit particularly hard by a recession, is bank lending now more likely to decline in the area, exacerbating the downturn? Or is bank lending now more likely to remain unchanged, moderating the downturn? The answer is important to local communities because it affects the volatility of their output and employment. But it is also important to the national economy, because the distribution of credit across markets can affect overall productivity and growth.

In principle, the shift to multi-market banking could either increase or decrease the sensitivity of bank lending to local economic shocks. On the one hand, the ability of multi-market banks to shift funds to offices in other markets could make these banks more prone to reduce local lending when a slowdown in the local economy decreases the creditworthiness or credit demands of local borrowers. On the other hand, the diversification and capital-market access of multi-market banks could make them better able to continue funding local loans when a local economic downturn reduces the availability of funds from depositors or decreases bank capital. Moreover, while multi-market banks may be better able to shift lending from slumping markets to thriving markets, two factors could deter them from making such a shift--a greater ability to cope with increases in the risk of local lending, and a lesser ability to identify and react to changes in local economic conditions.

Because the impact of multi-market banking is ambiguous in theory, the only way to determine how the sensitivity of bank lending to local economic shocks has been affected is to examine the data. Until recently, such empirical studies have been hampered by the lack of data on bank lending at the local level. In the mid-1990s, a new source of data on local lending to small businesses became available as part of the Community Reinvestment Act (CRA), a law enacted a decade earlier to encourage banks to lend to their local communities. This article uses the new data to examine the impact on local lending of the slowdowns in some local economies during the 2001 recession and recovery. The basic approach is to see whether these slowdowns had a different effect on lending by single-market banks than on lending by multi-market banks. The article finds substantial support for the view that the shift to multi-market banking has reduced the overall sensitivity of bank lending to local economic shocks. The article also finds some evidence that this effect may be due to a lesser ability of multi-market banks to identify and respond to changes in local economic conditions.

The first section of the article documents the sharp increase in the importance of multi-market banking over the last two decades. The second section discusses the different effects that multi-market banking could have on the response of bank lending to local economic shocks. The next section describes the new CRA data on local lending to small businesses and explains why the 2001 recession and recovery provide a good opportunity to examine the impact of multi-market banking on such lending. The third section describes the specific approach used to investigate the impact of multi-market banking and presents the main findings. The last section discusses the implications of the findings.

I. THE SHIFT TO MULTI-MARKET BANKING

The U.S. banking industry has undergone significant consolidation during the last three decades. …

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