Bank Failure, Relationship Lending, and Local Economic Performance
35 Pages Posted: 14 Nov 2013
Date Written: October 1, 2013
Whether bank failures have adverse effects on local economies is an important question for which there is conflicting and relatively scarce 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 inter-bank competition are more strongly affected by bank failure.
Keywords: bank failure; relationship lending; financial crisis; bank regulation
JEL Classification: G21, G18, G33, E24
Suggested Citation: Suggested Citation