Community bank performance in the presence of county economic shocks

Timothy J. Yeager

No 2002-11, Supervisory Policy Analysis Working Papers from Federal Reserve Bank of St. Louis

Abstract: A potentially troubling characteristic of the U.S. banking industry is the geographic concentration of many community banks* offices and operations. If geographic concentration of operations exposes banks to local market risk, we should observe a widespread decline in their financial performance following adverse economic shocks. By analyzing the performance of a sample of geographically concentrated U.S. community banks exposed to severe unemployment shocks in the 1990s, we find that banks are not particularly sensitive to local economic deterioration. Indeed, performance at banks in counties that suffered economic shocks is not statistically different from performance at banks that did not suffer economic shocks. These findings suggest that an additional supervisory tax such as higher capital requirements on banks with geographically concentrated operations is unwarranted. They also suggest that such banks are unlikely to reduce risk significantly through geographic expansion. Finally, bank supervisors should not rely systematically on county-level labor data to forecast or even to explain contemporaneous community bank performance. Rising county-level unemployment rates are consistent with both healthy and deteriorating bank performance.

Keywords: Community banks; Regional economics (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlsp:2002-11

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