Local Banking Market Research Articles

The actual effects of supervision on small and medium-sized banks and the local banking market

Cet article analyse le rôle de superviseur de la Banque d’Italie vis-à-vis d’un groupe de petites et moyennes banques locales dans les années 1920-1930. Plus spécifiquement, la recherche vise à analyser : a) comment la supervision a été effectivement exercée, b) l’impact de la supervision sur les banques ; c) l’impact de la supervision sur le marché du crédit local. L’analyse - basée sur des documents d’archives - est menée au niveau microéconomique, en se concentrant sur les banques individuelles dans une zone géographique donnée (le nord-est de l’Italie), mais elle est également intégrée dans le tableau macroéconomique plus large. L’article montre que, suite à l’introduction des nouvelles règles, le système bancaire local a été reconfiguré sur le plan quantitatif et qualitatif.

The effects of banking market structure on corporate cash holdings and the value of cash

We investigate the impact of the local banking market structure on the level of corporate cash holdings and the value of cash. We find that, in more concentrated banking markets, firms increase their cash holdings by issuing more equity. The marginal value of $1 cash increases by 10 cents with a one-standard-deviation increase in bank concentration. The positive relationship between bank concentration and value of cash is robust to a rich set of tests such as for firms having access to bond markets or firms using syndicated loans and is more prominent for more financially constrained firms. We also explore the mechanism, and our results suggest that in more concentrated banking markets firms demand more cash to shield against default risk.

Banking Market Structure and Trade Shocks

The structure of the local banking market, characterized by bank specialization and bank concentration, can affect credit and labor market responses to an import shock to the local economy. During the surge in U.S. imports from China from 1998 to 2006, small business loans (SBL) decline in counties that face a larger import shock. Bank geographical specialization positively affects banks’ SBL origination in response to the import shock. Consistent with these results, average employment declines in counties hit by the import shock, while higher bank specialization attenuates this negative labor outcome. Furthermore, in the face of import competition, credit support by specialized banks helps small businesses to respond to the heightened competition through firm innovation. We find little evidence for such stabilizing effects for bank concentration.

Regional entrepreneurship and the structure of the banking market

ABSTRACT This paper investigates whether local banking market structure affects regional entrepreneurship, measured by new firm formation. Considering provincial data over the period 2011–21 in Italy, we found that bank concentration and firm formation had an inverted ‘U’-shaped relationship. Lower levels of bank concentration fostered firm formation, but above a market share of about 58% for the largest banks, which is seen in the South and some peripheral and inner areas of central and northern Italy, increased concentration reduced firm formation. However, the presence of local banks is beneficial for the birth of new firms and can reduce the negative impact of high concentration. These findings suggest that banking market structure plays an important role in shaping regional entrepreneurship.

Why Local Banking Market Concentration Hinders IPOs and How It Can Work to Issuers’ Advantage

Why Local Banking Market Concentration Hinders IPOs and How It Can Work to Issuers’ Advantage

Financial permeation and rural poverty reduction Nexus: Further insights from counties in China

We investigate how financial permeation affects rural poverty reduction by matching representative county household data with the local banking market, FinTech development, and county characteristics data from China. We discover that financial permeation via bank branch expansion boosts household income and mitigates household vulnerability to poverty, and these effects are magnified on lower-income and more vulnerable households, especially in impoverished counties. Further considering the potential substitution effect of FinTech, we verify that enhancing financial permeation via bank branch expansion still matters to rural poverty reduction even in the digital era. Exploring the channels, we find that financial permeation accelerates rural poverty reduction directly through improving financial utilization and motivating investment activities and indirectly through spurring local economic growth. Notably, the more pronounced marginal effects of the channels on households in impoverished counties, to some extent, explain the poverty reduction effect of financial permeation. The results imply the necessity of financial permeation via bank branch expansion for the realization of shared prosperity.

Deregulation, Entry, and Competition in Local Banking Markets

By applying the Bresnahan-Reiss empirical entry threshold model on Census data for the waves 1981 to 2011, we study the evolution of entry conditions in Italian local banking markets under a long-run perspective in order to capture the consequences of the removal of branching restrictions that occurred in the early 1990s. We do not find evidence of collusive behavior among local banks; instead, competition seems to have increased with respect to the number of banks and through the years—even if banks’ variable profits have risen over time. Overall, banks appear to have responded to the growing competition through the adoption of non-price strategies.

Local Banking Market Frictions and Youth Crime: Evidence from Bank Failures

Local Banking Market Frictions and Youth Crime: Evidence from Bank Failures

Why local banking market concentration hinders IPOs and how it can work to issuers’ advantage

General sample evidence conceals the influence of banking market structure on a fraction of IPO issuers with limited financing options: small non-venture-capital-backed firms (SNVC). Using U.S. county-level data, we reveal that concentrated banking markets contract IPO activity, as they cause SNVCs to incur high underpricing at listing. However, when the size of the local banks is small, both the time to IPO and underpricing decrease. Our evidence infers that, unless banks are organizationally capable of tapping into soft information, they generally use market power for rent extraction, which has important spillover effects on the IPO market.

Cyberattacks on Small Banks and the Impact on Local Banking Markets

Small banks are targets of a large number of cyberattacks. Using a sized-matched difference-in-differences design, we document that successful cyberattacks decrease branch deposit growth rates at small US banks. This decrease is due to bank-specific reputational damages that erode the trust of bank customers. The loss of trust results in a reallocation of deposits within local banking market to large banks. The reallocation is the consequence of a “flight-to-reputation” by depositors since it favours primarily large banks with a high reputation. We next document that cyberattacks affect the relationships between banks and customers in mortgage markets wherein hacked banks attract riskier applicants and are forced to lower their credit standards. Ultimately, our results imply that cybersecurity investments are crucial for banks to attract and retain customers and indicate that financial constraints in small banks can lead to local banking markets increasingly dominated by large banks. We highlight how this change in market structure can affect access to credit of small local businesses and impede the development of local economies.

Nurturing regional innovation: the effects of bank competition in the USA

Whilst corporate innovation is one of the key drivers of regional economic growth, question remains over how regional corporate activities are affected by local banking market structure. By attaching regional corporate innovation activities to a market power hypothesis, this paper examines (1) if regional innovation activities would benefit from the improved banking market competition and (2) the variation of banking market competition effects on innovation outputs over unique regional characteristics, such as state-level R&D intensity and distribution of innovation activities. Using patent and citation data and local bank data from 51 states in U.S between 1992 and 2004, we show that improved local banking market competition increases both the quantity (patents) and quality (citations) of regional innovation outputs. It is also found that such a favourable effect on regional innovation is especially stronger for those states with low R&D intensity and those with more concentrated innovation activities.

Nurturing regional innovation: the effects of bank competition in the USA

Whilst corporate innovation is one of the key drivers of regional economic growth, question remains over how regional corporate activities are affected by local banking market structure. By attaching regional corporate innovation activities to a market power hypothesis, this paper examines: 1) if regional innovation activities would benefit from the improved banking market competition; 2) the variation of banking market competition effects on innovation outputs over unique regional characteristics, such as state-level R&D intensity and distribution of innovation activities. Using patent and citation data and local bank data from 51 states in the USA between 1992 and 2004, we show that improved local banking market competition increases both the quantity (patents) and quality (citations) of regional innovation outputs. It is also found that such a favourable effect on regional innovation is especially stronger for those states with low R&D intensity and those with more concentrated innovation activities.

Banking Market Structure and Trade Shocks

We study how the structure of the local banking market characterized by bank specialization and bank concentration affects credit and labor market responses to an import shock to local economies. We find that during the surge in U.S. imports from China from 1998 to 2006, small business loans (SBL) decline in counties that face a larger import shock. We show that bank geographical specialization positively affects banks' SBL origination in response to the import shock, while we do not find a significant effect with respect to bank concentration. Consistent with these results, we show that while on average employment and wages decline in counties hit by the import shock, higher bank specialization attenuates these negative labor outcomes, whereas bank concentration does not seem to have such attenuation effects.

Bank Size and Household Financial Sentiment: Surprising Evidence from University of Michigan Surveys of Consumers

AbstractWe analyze comparative advantages/disadvantages of small and large banks in improving household financial sentiment. Matching University of Michigan Surveys of Consumers household sentiment data with local banking market data from 2000 to 2014, we find surprising results—large banks have significant comparative advantages in boosting such sentiment. The findings apply across demographic groups, market types, and time periods, and are robust to different measurements and econometric methods. We contribute to the literatures on bank specialness, benefits and costs of small and large banks, household sentiment, and real effects of banking. We conjecture about the drivers of the findings, and discuss policy implications.

THE IMPACT OF THE ACTIVITIES OF NON-RESIDENTS BANKS ON THE NATIONAL ECONOMY

The paper examines the effectiveness of the operations of non-resident banks in Kazakhstan. Performance assessment of non-resident banks in the local banking market is based on the model developed by the authors. The model is based on the indicators of the system of national accounts, and includes three stages of analysis: evaluation of the impact on real economy, estimation of performance of the intermediation function of a bank and the assessment of the bank’s stability. The object of study is Russian commercial banks operating in the Republic of Kazakhstan. In the study, the major factors contributing to the development of Russian banks in the financial market of the Republic of Kazakhstan are identified. In the present day circumstances all countries in the world experience the impact of the dynamic processes of globalization and integration. It differs from country to country: these processes have a considerable, often adverse, impact on developing countries, as indicated by some prominent economists, for example, J. Stiglitz [1]. Promotion of regional economic integration in its essence is considered only with regard to trade and partly investment cooperation. At the same time, undeservedly less attention is paid to the activities of commercial banks as to important financial intermediaries participating in the replenishment process. In these circumstances, it is important to analyze the issues associated with the improvement of performance efficiency of non-resident bank in the Kazakhstan banking sector. The aim of the paper is to investigate the impact of the activities of non-resident banks on the national economy and to develop an adequate methodology for their efficiency assessment. The choice of the object has been determined by the following preconditions: integration economic development of the two countries; the transition of both countries to the innovative model of development and restructuring of the national economy, development of the legal and institutional infrastructure for establishment of the common financial area between the two counties; functioning of the Customs Union since 1 January, 2010, the presence of favorable financial conditions for the participation of Russian banks in the banking market of Kazakhstan and other factors. The research methods used in this paper are: systematic approach, statistical, logical, and comparative analysis of the scientific literature, the analysis of bank annual reports. The analysis revealed that the Russian banks in Kazakhstan are actively encouraging the sphere of circulation, increasing inflation in the country. The Russian banks in Kazakhstan contribute to increase of redistribution of incomes, but do not develop the real sector and its innovation component in the Republic of Kazakhstan. The object of the research is Russian banking capital in the Kazakhstan market. The choice of the object has been determined by the following pre-conditions: Integrated economic development of the two countries that provides for mutual commercial, economic, and cultural relations; The transition of both countries to the innovative model of economic development and restructuring of the national economy; Growing congruence between two countries with regard to the level of socio-economic development, selected models and resources for economic development; Cooperation between the countries under discussion in the field of the planned synchronization of the WTO accession process; Development of the legal and institutional infrastructure for establishment of the common financial area between the two counties; Functioning of the Customs Union since 1 January, 2010, and other factors. Financial pre-conditions for the development of the favorable environment for participation of the Russian banks in the Kazakhstan market include: Uniformity of taxation systems of both countries, establishment of the national taxation systems on the basis of the Tax Code and their unification, identical elements in the taxation systems, coordinated reforms of the taxation systems; Considerable uniformity in the field of state finances: codification and harmonization of budgeting legislation on common principles; Current macroeconomic indicators pointing at the convergence of the economic development trends in the two countries: inflation rate, average weighted rate on long-term loans, public debt, etc. The level of development of the two countries is similar considering basic economic indicators; Provision of sufficient economic stability as a necessary premise for implementation of coordinated structural reforms of the economies of the two countries; Transition of the economies of both countries to the innovative development model and establishment of the common innovation space based on the usage of production, intellectual, technical and scientific potential of two states; Harmonization and unification of customs tariff policies aimed at support of new manufacturing enterprises and increase of investment potential of particular industries and agriculture.

Comparative advantages of regional versus national banks in alleviating SME's financial constraints

This paper provides new evidence on the impact of local banking market structure on SME's access to credit and emphasize the comparative advantages of regional versus national banks in alleviating SME's financial constraints. Matching a unique dataset on bank branch-level and firm-level information for a sample of 33,165 French manufacturing firms over the 2005–2013 period, we rely on two alternative indicators to capture different dimensions of SMEs financial constraints and find significant differences in the drivers of these constraints. While higher market share of regional banks or stronger presence of geographically-focused banks helps to alleviate SMEs' short-term credit constraint, higher market share of national banks or stronger presence of geographically-diversified banks is beneficial to reduce SMEs investment cash-flow sensitivity. Moreover, in both cases, SMEs' financial constraints are strengthened in functionally-distant markets. In addition, during crisis times, the benefits of relationship banking on short-term credit constraint remain and, in some cases, are reinforced. We also find that these benefits differ according to SMEs pre-crisis financial health. Regional banks facilitate access to short term credit for firms which were more profitable before the global financial crisis and particularly those who experienced a sharp decline in profitability in troubled times, supporting the hypothesis of continuation lending by relationship banks during economic downturns.

Divorce and Credit

Does failure in a marriage foretell a failure to repay credit? Analyzing the retail loan portfolio of a representative bank, we find no significant difference in probability of default between divorcees and others, but do find evidence for taste-based discrimination. Divorcees pay 5.8 basis points more in interest than non-divorced peers. This discrimination is greater in regions where clan culture is more dominant, and among loan officers who are male, are older, and have been longer on the job. Such discrimination is reduced if the loan officers are better educated, and if competition in local banking market is fiercer.

Leverage and Risk-Taking Channel of Monetary Policy: Evidence from the Euro Area Banking Industry

We present evidence for the euro area of a risk–taking channel of monetary policy induced by a low interest rate environment following the 2008 Global Financial Crisis (GFC). Based on dynamic panel techniques, we find that credit risk (measured ex–ante and ex–post) is negatively associated with variations in interest rates, while competition in national banking industries tends to enhance this effect. Such negative relationship is also most pronounced for banks with relatively high levels of leverage, which is consistent with a search for yield effect. Eventually, we identify nonlinearities depending on the level of bank capitalization. These findings for the euro area are strikingly different from the U.S. banking industry, confirming that time, geographical circumstances, and local banking market conditions are key in understanding the impact of monetary policy on credit risk. This paper also points to the importance for theoretical literature to consider alternative channels of risk-taking in addition to traditional portfolio rebalancing channels.

The Job Preservation Effects of Paycheck Protection Program Loans

The Paycheck Protection Program (PPP) covered in excess of 80% of eligible U.S. small businessemployment, supporting 51 million American jobs through the program’s close on August 8th,2020. Of those supported jobs, how many would have been lost in the absence of PPP loans?To answer this question, we propose an empirical strategy to identify the effects of PPP loanson county-level unemployment insurance claims. Specifically, we exploit variation in the timingof loan receipt caused by differences in local banking market structure across US counties. Onthe margin, we estimate that a 10 percentage point increase in eligible payroll covered by PPPresulted in a 1 to 2 percentage point smaller jump in weekly initial unemployment insurance(UI) claims, as a share of employment covered by UI. With a lag, that same 10 percentagepoint increase in PPP coverage resulted in an estimated 5 percentage point smaller increasein the insured unemployment rate. In order to compare our estimates with related studies,we calculate an aggregate employment effect of PPP loans. Moving from the 25th percentileto 75th percentile of counties by early PPP coverage causes an improvement in the insuredunemployment rate of over 12 percentage points, or, extrapolated nationally, 18.6 million jobs.We note meaningful caveats to interpreting this paper’s aggregate number; the same caveats thatapply to other papers evaluating PPP loans. This paper’s estimates are an order of magnitudelarger than previous evaluations of PPP, which have tended to find small employment effects ornone at all.

Will Money Talk? Firm Bribery and Credit Access

AbstractWe investigate whether corruption impedes firm growth by limiting access to bank credit. Our estimates demonstrate that access to credit tightens when a firm is more frequently involved in bribery practices and that bribery (most likely) causes this loss of access. We also find that the detrimental impact is mainly driven by supply‐side rather than demand‐side factors and that the loss of access is particularly strong when there are fewer foreign banks in the vicinity of the firm or when competition is either very low or very high in the local banking market. Finally, the bribery‐driven increase in financing obstacle significantly impedes future firm growth.