By Caleb Taylor
What’s killing community banks in rural states?
A new paper “Decline in State Chartered Banks: Causes, Concerns, Conclusions” published in the May, 2019 edition of Studies in Business and Economics attempts to answer this question.
The paper is co-authored by Hannah James, a former ACRE research fellow, UCA Associate Professor of Economics and ACRE Director David Mitchell and UCA Professor of Finance Michael Casey.
James graduated from UCA in May 2017 with a degree in finance and a minor in honors interdisciplinary studies. Her research focused on agricultural lending by community banks in the south and the effects that the decreasing number of community banks could have on Arkansas’s economy. She is currently pursuing a PhD in Finance at the University of Mississippi and is expected to graduate in 2022. The paper was her ACRE fellows project.
The authors examine the decline of state chartered banks in Alabama, Arkansas, Tennessee, Nebraska and Oklahoma and find that GDP per capita is almost statistically significant with the decline in equity capital in rural, state chartered banks.
James, Mitchell and Casey conclude:
This finding implies that equity capital could have a tendency to decrease as GDP per capita increases, which provides a better chance for state chartered banks to stay open. However, the fact that these banks are more likely to be successful with lower equity capital raises additional concerns. One such concern is how they will be able to respond to economic shocks, considering that more equity capital provides a cushion for banks that helps reduce the rate of failure. The finding that state chartered banks are more likely to stay open leads to a lower level of equity capital is concerning. Equity capital provides an important buffer for banks against unexpected shocks and losses. The inability of state chartered banks to successfully maintain higher levels of capital could lead to them being more at risk to sudden economic shocks.”
James was a part of ACRE’s Research Fellowship Program from 2016-2017. Fellows work throughout the academic year with a professor to write a publishable research paper that is presented at the annual Society of Business, Industry, and Economics conference. She also had a letter to the editor published on the decline of community banking in The Pine Bluff Commercial.