The Evolution of U.S. Community Banks and Its Impact on Small Business Lending

Julapa Jagtiani, Ian Kotliar and Raman Quinn Maingi
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Raman Quinn Maingi: ?

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: There have been increasing concerns about the potential of larger banks acquiring community banks and the declining number of community banks, which would significantly reduce small business lending (SBL) and disrupt relationship lending. This paper examines the roles and characteristics of U.S. community banks in the past decade, covering the recent economic boom and downturn. We analyze risk characteristics (including the confidential ratings assigned by bank regulators) of acquired community banks, compare pre- and post-acquisition performance and stock market reactions to these acquisitions, and investigate how the acquisitions have affected SBL. Contrary to concerns, we find that the overall amount of SBL tends to increase after a large bank acquires a community bank. The ratio of SBL to assets does decline in the large acquiring banks but at a slower rate than the decline seen in surviving community banks. Further, community banks that were merged during the financial crisis were mostly in poor financial condition, had been rated as unsatisfactory by their regulators on all risk aspects, and would have been unlikely to continue lending. We found that community bank targets accepted smaller merger premiums (or even discounts) to be part of a large banking organization. Our results indicate that mergers involving community bank targets over the past decade have enhanced the overall safety and soundness of the banking system without adversely impacting SBL. This implies that a policy that discourages mergers between community banks and large banks is unwarranted and could potentially result in a weaker financial system and have an unintentional dampening effect on the supply of SBL.

JEL-codes: G21 G28 G34 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-cfn and nep-ger
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Working Paper: The evolution of u.s. Community banks and its impact on small business lending (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:upafin:14-17

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