Bank Failure, Relationship Lending, and Local Economic Performance
41 Pages Posted: 10 Jun 2014
Date Written: May 21, 2014
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 lead to 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, bank regulation, financial crisis
JEL Classification: G21, G18, G33, E24
Suggested Citation: Suggested Citation