Local economic effects of bank failures

Abstract

This study tests the hypothesis that bank failures have adverse effects on economic activity in the communities where the failed banks are located. The literature on the economic effects of credit constraints provides the theoretical foundation for adverse economic effects of bank failures. The data are for rural counties in Kansas, Nebraska, and Oklahoma. The measures of local economic activity are the value of sales and employment. The empirical results indicate that bank failures depress local sales, and, for some of the states, the closing of failed banks depresses local employment.