Multi-office bank lending to small businesses: some new evidence

In a long-awaited move, Congress enacted legislation last fall authorizing full interstate banking. While most states had already acted to allow some form of entry by outside holding companies, the new law was expected to hasten the spread of large multi-office banking organizations. Most analysts believe the change will benefit the public by increasing competition, improving services to depositors, and reducing banks' vulnerability to local downturns. Concern has been voiced, however, that the benefits of multi-office banking may be achieved at the expense of small businesses. Some analysts worry that large multi-office banks will be less able or less willing to lend to small businesses than the smaller banks they replace.> Keeton investigates the relationship between multi-office banking and small business lending using new information on small business loans in Tenth District states. Data for mid-1994 support the view that further growth in multi-office banking may impose short-run costs on some small businesses. He cautions, though, against concluding that multi-office banking should be curtailed. Instead, regulators should continue to ensure that local banking markets remain competitive, so other banks can step in and fill any gaps in the legitimate credit needs of small businesses.Bank loans ; Small business

Do bank mergers reduce lending to businesses and farmers? New evidence from Tenth District states

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? Keeton 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.Bank loans ; Bank mergers ; Federal Reserve District, 10th

Are rural banks facing increased funding pressures? : evidence from Tenth District states

During the last several years, concern has increased that changes in the financial system have made it harder for rural banks to attract enough deposits to meet local credit demands. While urban banks may face some of the same problems, it is widely believed that funding pressures have increased more for rural banks than for urban banks. In response, bank trade groups and rural development officials have proposed new measures to expand rural banks' access to loanable funds.> Three factors have led to the increased concern about the ability of rural banks to fund their loans. Firs, loan-deposit ratios have risen sharply, reaching record highs in the last two years. Second, rural deposit growth has been sluggish. Third, increasing numbers of rural banks have been taken over by urban banks and converted to branches.> Keeton examines recent loan and deposit trends in Tenth District states to see what evidence exists for each of the three sources of concern about rural funding pressures and to see if the concerns are more justified for rural banks than urban banks. Overall, the evidence indicates that sluggish deposit growth has increased funding pressures at rural banks but not any more than at urban banks of the same size. In short, increased funding pressures appear to be a small-bank problem rather than just a rural problem. This finding is tempered, however, by two important caveats. First, funding pressures could become more severe at rural banks than urban banks if rural investors begin investing as much of their wealth in mutual funds as urban investors do. Second, small-bank funding pressures are likely to have a bigger impact on rural borrowers because small businesses in rural areas are more dependent on small banks for loans.Rural areas ; Banking market ; Banks and banking ; Federal Reserve District, 10th ; Banks and banking

The transformation of banking and its impact on consumers and small businesses

The banking industry has undergone profound changes during the last decade. The most obvious change has been the large number of bank mergers, which have increased both the average size of banks and the area over which they operate. Other changes may also prove dramatic but are at this point just getting under way—the growth of Internet banking and the combination of banking with other financial services, such as insurance and securities underwriting.> The implications of these changes for the profitability and safety of banks have been widely discussed, but what do they mean for local economies? Some analysts argue that the changes will benefit most communities by increasing the public’s access to financial services and making it easier for banks to continue lending during regional economic downturns. Others argue that the changes will end up hurting many communities, especially smaller ones, because the large organizations created by mergers will be uninterested in serving small customers and will siphon off funds from smaller markets to lend in big cities.> To shed light on the debate, Keeton focuses on the two groups that are most likely to be affected by the transformation of banking—consumers and small businesses. He concludes that the recent changes in banking are likely to benefit consumers and small businesses in most communities, as long as they remain free to choose between small and large banks for their banking services.Bank mergers

Does faster loan growth lead to higher loan losses?

During the last couple of years, concern has increased that the exceptionally rapid growth in business loans at commercial banks has been due in large part to excessively easy credit standards. Some analysts argue that competition for loan customers has greatly increased, causing banks to reduce loan rates and ease credit standards to obtain new business. Others argue that as the economic expansion has continued and memories of past loan losses have faded, banks have become more willing to take risks. Whichever explanation is correct, the acceleration in loan growth could lead eventually to a surge in loan losses, reducing bank profits and sparking a new round of bank failures. As the experience of the early 1990s made clear, such a slump in banking could not only threaten the deposit insurance fund but also slow the economy by discouraging banks from granting new loans.> The view that faster loan growth leads to higher loan losses should not be dismissed lightly; nor should it be accepted without question. If loan growth increases because banks become more willing to lend, credit standards should fall and loan losses should eventually rise. But loan growth can increase for reasons other than a shift in supply, for example, businesses may decide to shift their financing from the capital markets to banks, or an increase in productivity may boost the returns to investment. In such cases, faster loan growth need not lead to higher loan losses.> Keeton explains why supply shifts are necessary for faster loan growth to lead to higher loan losses and determines if supply shifts have caused loan growth and loan losses to be positively related in the past. On balance, he finds limited support for the view that supply shifts have caused loan growth and loan losses to be positively related. Data on business loans and delinquencies show that states experiencing unusually rapid loan growth tended to experience unusually big increases in delinquency rates several years later. His finding is tempered, however, by evidence on business loan growth and business credit standards suggesting that changes in loan growth are not always due to shifts in supply.Bank loans ; Loans

Banking consolidation in Tenth District states

Bank mergers have attracted much attention during the last year due to a surge in mergers among the nation's largest banking companies. The consolidation of the banking industry has been going on much longer, however. Since the early 1980s, the number of banking organizations has fallen by more than a third in both Tenth District states and the nation as a whole. Some of the decline has been due to failures, but most has been due to mergers.> In debating the pros and cons of such consolidation, analysts point to three important ways it may alter the structure of the banking industry. First, if consolidation occurs through the absorption of small banks by large banks, it may reduce the role of small banks in the banking system. Second, if consolidation occurs through the merger of banking organizations in different markets, it may increase the geographic scope of bank operations -that is, the extent to which banks operate over wide areas within and across state lines. And third, if consolidation occurs through the merger of banking organizations within the same market, it may increase the concentration of local markets -that is, the tendency for markets to be dominated by a few banks. Analysts agree each of these effects is important to bank owners and customers but disagree as to whether each effect is beneficial or harmful on balance.> Keeton examines whether consolidation has had these effects, and if so, to what degree for Tenth District states. He concludes that consolidation has reduced the role of small banks, increased geographic diversity, and increased local market concentration. The magnitude of these effects, though, has differed across states and between urban and rural markets within each state.Bank mergers ; Federal Reserve District, 10th

Has multi-market banking changed the response of small business lending to local economic shocks?

The consolidation of the U.S. banking industry has greatly increased the importance of large multi-market banking organizations relative to smaller, single-market banks. An issue that has not received much attention is how multi-market banking has affected the response of local bank lending to local economic shocks. When an area is hit particularly hard by a recession, is bank lending now more likely to decline in the area, exacerbating the downturn? Or is bank lending now more likely to remain unchanged, moderating the downturn? The answer is important to local communities because it affects the volatility of their output and employment. But it is also important to the national economy, because the distribution of credit across markets can affect overall productivity and growth. ; Keeton uses new data to examine the impact on local lending of the slowdowns in some local economies during the 2001 recession and recovery. The basic approach is to see whether these slowdowns had a different effect on lending by single-market banks than on lending by multi-market banks. He finds substantial support for the view that the shift to multi-market banking has reduced the overall sensitivity of bank lending to local economic shocks. He also finds some evidence that this effect may be due to a lesser ability of multi-market banks to identify and respond to changes in local economic conditions.

Survey of Tenth District manufacturers

Manufacturing activity in the Kansas City Federal Reserve District expanded in July but at a slightly slower pace than earlier in the year, according to a quarterly survey of manufacturers across the district. The survey takes a snapshot of manufacturing the first month of each quarter by asking plant managers about a variety of manufacturing indicators (Table 1). By most measures, manufacturing showed a modest expansion during July. Inventories of raw materials and finished goods were generally unchanged at district factories. Prices received for finished goods held steady, while prices of raw materials increased modestly. Overall, manufacturing remained stronger than a year ago, and manufacturers were optimistic about the outlook for the next six months.Federal Reserve District, 10th ; Manufactures