Bank on it: Do Local Banks Contribute to Rural Community Prosperity?*

Abstract

AbstractRecent research on the restructuring of the financial industry from local banks to interstate conglomerates has raised questions about the impact on nonmetropolitan economies. In this paper, we develop two competing hypotheses and scrutinize the impact of local bank concentration (percent banks that are locally headquartered) on four measures of economic growth from 1980 to 2010 in metropolitan, micropolitan, and non‐core Commuting Zones (CZs). We employ fixed effects panel regression models for the 1980–2010 time frame. We find that local bank concentration is positively related to business births and establishment dynamics in non‐core and micropolitan CZs. The effects of local banking on measures of income and wages fail to show consistent effects. There are no positive local banking concentration effects on economic growth in metropolitan CZs during this time frame. Implications for theory, research, and policy are discussed.