Bank Failure, Relationship Lending, and Local Economic Performance

35 Pages Posted: 14 Nov 2013

See all articles by John Kandrac

John Kandrac

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2013

Abstract

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

Kandrac, John, Bank Failure, Relationship Lending, and Local Economic Performance (October 1, 2013). Available at SSRN: https://ssrn.com/abstract=2353687 or http://dx.doi.org/10.2139/ssrn.2353687

John Kandrac (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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