Is the Decline in the Number of Community Banks Detrimental to Community Economic Development?

Bernadette Minton, Alvaro G. Taboada and Rohan Williamson

No 32521, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Our research examines the impact of dwindling community bank numbers on community investment and economic development. Initially, we confirm the vital role of community banks’ small business lending in local development. Contrary to popular belief, we find that a decrease in community banks positively affects community investment, through small business loan (SBL) originations. Key factors include the local presence of other community banks and the continuity of the consolidating bank's presence. Interestingly, the effect remains neutral in underserved or distressed counties and diminishes when a large bank acquires a community bank without maintaining a local presence. Post-consolidation, community banks emerge larger and more robust, capable of issuing larger SBLs, while larger banks and Fintech firms contribute by providing smaller SBLs. Overall, our findings reinforce the critical contribution of community banks to local development, suggesting that a reduction in their numbers leads to a stronger, more stable banking infrastructure in the small business lending landscape.

JEL-codes: G2 G20 G21 G28 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-ent, nep-fdg, nep-mac and nep-ure
Note: CF
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