Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Do Bank Mergers Reduce Lending to Businesses and Farmers? New Evidence from Tenth District States

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Do Bank Mergers Reduce Lending to Businesses and Farmers? New Evidence from Tenth District States

Article excerpt

The banking industry has undergone substantial consolidation during the last 15 years, and that process has accelerated in the 1990s. One effect of this consolidation has been to greatly reduce the number of independent and locally owned banks. Some banks have been acquired by distant banking organizations, and some have been acquired by banking companies that were nearby but very large, causing the banks to become junior partners in the new organization.

Since independent and locally owned banks have been important sources of funds for local businesses and farmers, concern has arisen that such borrowers will now find it harder to obtain credit. In principle, the extra safety and liquidity that newly acquired banks enjoy from belonging to a larger, more diversified banking organization could enable the banks to lend more to local farms and businesses. But some analysts worry that banks acquired by large or distant organizations will lend less to local borrowers because the parent company cannot make credit decisions as efficiently or has other preferred uses for the banks' funds.

Is this concern warranted? This article finds that recent bank mergers in Tenth District states provide partial support for the claim that banks acquired by large or distant organizations reduce lending to local farms and businesses. The article notes, however, that such declines in local lending need not be harmful if they are offset by increased lending at other banks in the same market or if they reflect a reallocation of credit to more profitable markets. The first section summarizes the debate over the effects of bank mergers on lending to local businesses and farmers. The second section shows that most of the bank mergers that occurred in Tenth District states during the last decade either shifted ownership to distant markets or made banks junior partners in their organizations. The last section examines the effect of these mergers on farm and business lending at acquired banks. The section shows that business lending tended to fall when out-of-state companies acquired banks owned by urban holding companies. The effect was weaker in the 1990s than in the late 1980s, however, and lending showed no tendency to fall in other mergers that shifted ownership to distant markets or made banks junior partners in their organizations.

THE DEBATE OVER THE EFFECT OF MERGERS ON BANK LENDING

The debate over the effect of mergers on bank lending has focused on farm and business loans because local borrowers are more dependent on such loans than on other types of bank loans. If a locally owned bank cuts back on consumer lending or real estate lending after being acquired, the bank's customers can usually turn to alternative sources of credit such as a mortgage banker, finance company, or credit card bank. Farmers and businessmen may have fewer alternatives if their local bank denies them credit, because other lenders have much less information than the bank about their creditworthiness. Thus, the local economy is more likely to suffer if banks acquired in mergers reduce their farm and business lending than if they reduce their other types of lending.

Both sides in the debate agree that mergers are likely to affect farm and business lending in a systematic way only if ownership of the acquired bank shifts to a distant location or the bank becomes a junior partner in the new organization. If, for example, ownership of a small urban bank merely shifts from one large in-state holding company to another as a result of a merger, there is no reason to expect the bank's lending to change in a particular way. To be sure, the bank's new owners may have different attitudes about risk or beliefs about market conditions, and those different attitudes and beliefs may change the bank's lending behavior. On average, however, mergers that leave the geographic ownership and organizational status of the bank unchanged should also leave the bank's lending unchanged. …

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