The demise of community banks? local economic shocks aren't to blame
Timothy J. Yeager
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 local economic shocks. In addition, geographic diversification should help banks reduce risk significantly. By analyzing the performance of geographically concentrated U.S. community banks exposed to severe unemployment shocks in the 1990s, I find that banks are not systematically vulnerable to local economic deterioration. Indeed, differences in performance at banks in counties that suffered economic shocks relative to those that did not suffer economic shocks are either statistically insignificant or economically small. These findings suggest that banks are unlikely to engage in mergers and acquisitions primarily to reduce local market risk because that risk source is already low. This result bodes well for the continued existence of geographically concentrated community banks, though scale and scope economies will continue to reduce their numbers relative to larger banks.
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