changing rules and opportunities for community banks aaea 2000 organized symposium new sources of...
TRANSCRIPT
Changing Rulesand Opportunities
for Community Banks
AAEA 2000 Organized SymposiumNew Sources of Capital for Rural America
Maureen KilkennyIowa State University
Small Business Finance1993 NSSBF data, Berger & Udell JBF (1998)
owner equity
owner debtdebt to other individuals
other equity
govtother non-financialother debt
commercial banks
trade creditcredit cards
0%10%20%30%40%50%60%70%80%90%
100%
0-2 years 3-4 years 5-24 years over 25 yrs
maturity of firm
sour
ce s
hare
s
Distance from Primary Creditor1993 NSSBF Kilkenny & Kim (2000)
0.05.0
10.015.020.025.030.035.040.045.0
0 2 4 6 8 10 20 More than40
MILES
FRE
QU
EN
CY
(%)
MSA
NONMSA
tertiary creditor for NonMet biz
Rule 2. Gramm-Leach-Bliley (GLB) Act of 1999· repeals parts of Glass-Steagall (1933-6)· repeals parts of Bank Holding Co Act (1956)
Rule 1. Riegle-Neal Act of 1994∙ repealed McFadden Act (1927)
=> legalized multistate branch banking
=> legalizes broad banking, but not universal banking=> extends Federal Home Loan Banking system=> modifies Community Reinvestment Act
GLB permitssubsidiaries of commercial banks to:
underwrite and deal securities
sell insurance
financial holding companies to form and:own banks
underwrite and deal securities underwrite and sell insurance
conduct merchant banking
Underwrite & sell securities
Accept deposits & Make commercial loans
Underwrite & sell insurance
FINANCIAL HOLDING COMPANY
Commercial banking
Investment banking Insurance agency
Regulations on Mixing Commercial Banking,Securities, Insurance, and Commerce; By Country
country securities insurancebank ownershipof commercial
firms
commercialfirm ownership
of banks
UK unrestricted permitted unrestricted unrestricted
France permitted permitted permitted permitted
Canada permitted permitted restricted restricted
Germany unrestricted restricted unrestricted unrestricted
Japan restricted prohibited restricted prohibited
USA before GLB restricted prohibited prohibited prohibited
USA now permitted permitted prohibited prohibited
Barth, James, R. Dan Brunbaugh, and James Wilcox (2000) "The Repeal of Glass-Steagall and the Adventof Broad Banking," Journal of Economic Perspectives 14(2):191-204.
Opportunities:1) relationship lending2) economies of scope & scale
· data sharing and cross-selling· diversification
3) FHLB alternative source of funds (Federal Home Loan Bank)
Boot & Thakor (2000) "Can Relationship Banking Survive Competition?" The Journal of Finance 55(2):679-713
relationship loans(from banks)
transaction loans(banks & non-banks)
capital market financing (now possible by FHCs under GLB)
Low High
Opportunity: relationship lendingBorrower Quality and Type of External Finance
Community banks can now continue to serve clients as they mature
value of relationships remain internalized
Relationship with Primary Credit Institution1993 NSSBF, Kilkenny & Kim (2000)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.00 1 2 3 4 5 6 7 8 9
10 11 12 13 14 15 16 17 18 19 20
>20
YEARS
FRE
QU
EN
CY
(%) MSA
NONMSA
• Information acquisition
Opportunity: scope & scale economies
Additional, new financial services can be provided at lower marginal costs
Data sharing
• Administration & back office
Spread overhead
fixed costs in financial intermediation:
• Marketing & distribution Cross-selling
• Wider range of securities
Opportunity: diversification
Higher and more stable overall returns
Lower correlation
• Supply alternative types of finance
retain customers
• GLB Act permits banks (with assets <$500 mil.) to obtain FHLB advances
Opportunity: new sources of funds
Continue to provide loans to small businesses, small farms, and small
agribusinesses
Community banks can still obtain
cheap funds
RCaT(2000) 11(1):44
Numerous rural Banks were not members of the FHLB system in 1998
How will these changes affect the supply of capital to rural areas?
Q1: Threat to survival of community banks from legalized branching?A1: Since Riegle-Neal, more banks, more offices, and more lending to small businesses. Q2: Threat to banks that thrive on relationship lending? H2: GLB = Boon, not threat.
Q3: Threat of rural savings outflow reducing available funds? H3A: GLB increases community banks access to other (FHLB) sources of funds.
H3B:the less segmented are capital markets, the more sensitive credit flows are to local growth prospects. (Declining communities decline faster, growing communities grow faster.)
Commercial Banks:· provide ~half of debt finance· 3/4 of SBIC equity by bank holding cos. (Small Business Investment Companies)
· play key roles in communitiesmoneyinformation
banks
Business
Publicsector
Voluntaryorgs
Why change now?
• Empirical evidence that commercial banks underwrite better performing securities (of more mature firms)
• Experience: few problems with limited U.S. experience, or in other developed countries
• Technological Change: increased profits from cross-selling based on information sharing