Mencken, Carpenter, Lotspeich-Yadao, & Tolbert: Local Banks and Rural Prosperity

In Bank on it: Do Local Banks Contribute to Rural Community Prosperity?, authors F. Carson Mencken, Charles M. Tolbert (both Sociology, Baylor University), Craig Wesley Carpenter (Department of Agricultural, Food, and Resource Economics, Michigan State University), and Michael Lotspeich-Yadao (College of Applied Health Sciences, University of Illinois) examine and discuss the impact of locally owned banks on rural communities.

Access to financial capital is an important driver of economic growth and prosperity. This article examines the impact that local, community banks have on local economies. Specifically, the authors argue that non-metropolitan communities benefit most from access to local banking as opposed to large, interstate conglomerates.

The authors build upon existing research into rural access to financial capital in several unique ways. Prior research had typically examined financial access and rural economies at the county level. The authors here instead conduct their analysis through “commuting zones,” which are clusters of counties based upon commute-to-work patterns. Additionally, the authors analyze data from 1980-2010, expanding upon the majority of prior research which focused on smaller time frames. In doing so, the authors are able to identify more changes over time and examine rural economies beyond county lines.

Additionally, the authors attempt to control for a wide variety of variables outside of rurality, such as race and education. The article then examines the effect of local banking institutions on growth of establishments, new establishments, and increase of wages, across rural and urban spaces.

Ultimately, the authors found that local banks have a net-positive economic impact on local rural economies. In particular, the presence of more local banks in non-metropolitan areas was correlated with greater establishment growth in those communities. Local banks had over three times the positive impact on the formation of new establishments in rural economies when compared to a baseline of large conglomerate financial institutions. The authors also point out that this establishment growth due to local banks only exists in rural areas, with metropolitan economies fairing better with large, national banks. The authors opine that local banks and rural communities operate in a symbiotic relationship focused on interpersonal trust between the local lender and local borrowers.

Overall, the authors show the positive economic impact that local banks provide to rural communities when compared to large, interstate banks. The authors suggest that more local institutions have a vested interest in the economy of their community and may provide lending opportunities to businesses and individuals who may be denied access to financial capital by large banks.