We Miss You George Bailey: The Effect of Local Banking Conditions on the County-Level Timing of the Great Recession

Abstract

Community banks are the central financial institution in many places. They have a
unique capacity to alleviate firm credit constraints through economic downturns. This may
increase economic resilience, delaying or mitigating the effects of the Great Recession. We
estimate how the county-level banking access and community bank market share affect both the
timing and duration of the Great Recession. Using the Cox Proportional Hazards Model, we find
that communities with a higher community bank market share are either less likely to experience
recession conditions, or experience these conditions later. Using the Heckman Selection model,
we confirm these results, and show that communities with a higher community bank market share
are less likely to experience recession conditions. Importantly, we show that these results are
independent of the health of local banks, as we control for the mean tier one capital ratio in our
analyses. This research provides one of the first links between local financial institutions, and
economic resilience.

Keywords: Community Banking, Economic Resilience, Regional Economic Development

JEL Classification: R1, G2, O1