After the hurricane: Economic adversity, bank offices, and community banks

Abstract

Community banks have been in decline for decades in the U.S. yet are valuable because they often provide small business lending that larger banks avoid. This study may shed light on whether a severe economic contraction following a natural disaster, such as that due to the COVID-19 pandemic, will further contribute to that decline, using data on hurricanes followed by economic contraction or growth. For the analysis, U.S. counties hit by severe hurricanes between 2004 and 2012 are identified and differentiated according to whether there was substantial employment decline from the year prior to the year after the hurricane. Bank offices in these counties are tracked for seven years in terms of stayers, leavers, and new offices owned by community or large banks. The results reveal that areas with substantial employment decline are associated with higher rates of persistence and new openings among the community banks. Where hurricanes were followed by less severe contraction or economic growth, larger banks held an advantage in terms of both persistence and new offices. It is suggested that the value of soft information held by community banks is enhanced by severe adversity.