Abstract
This study tests the hypothesis that bank failures have adverse effects on economic activity in the communities where the failed banks are located. The literature on the economic effects of credit constraints provides the theoretical foundation for adverse economic effects of bank failures. The data are for rural counties in Kansas, Nebraska, and Oklahoma. The measures of local economic activity are the value of sales and employment. The empirical results indicate that bank failures depress local sales, and, for some of the states, the closing of failed banks depresses local employment.
Similar content being viewed by others
References
Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.”American Economic Review (June 1983), 257–276.
Calomiris, Charles W., Hubbard, R. Glenn and Stock, James H. “The Farm Debt Crisis and Public Policy.”Brookings Papers on Economic Activity (1986), 441–479.
Campbell, and Tim S. and Kracaw, William A. “Information Production, Market Signalling, and the Theory of Financial Intermediation.”Journal of Finance (September 1980), 863–882.
Chan, Yuk-Shee, Greenbaum, Stuart I. and Thakor, Anjan V. “Information Reusability, Competition and Bank Asset Quality.”Journal of Banking and Finance (June 1986), 243–253.
Diamond, Douglas. “Financial Intermediation and Delegated Monitoring.”Review of Economic Studies (July 1984), 393–414.
Eisenbeis, Robert A. “A Study of Geographic Markets for Business Loans: The Results for Local Markets.”Bank Structure and Competition. Proceedings of a Conference at the Federal Reserve Bank of Chicago, 1970, pp. 188–214.
Gelder, Ralph H. and Budzeika, George. “Banking Market Determination: The Case of Central Nassau County.” Federal Reserve Bank of New YorkMonthly Review (November 1970), 258–266.
Gertler, Mark. “Financial Structure and Aggregate Economic Activity.”Journal of Money, Credit and Banking (August 1988, part 2), 559–588.
Gilbert, R. Alton. “Bank Structure and Competition: A Survey.”Journal of Money, Credit and Banking (November 1984, part 2), 617–645.
Kaufman, George C..Business Firms and Households View Commercial Banks: A Survey of Appleton, Wisconsin. Chicago: Federal Reserve Bank of Chicago, 1967a.
Kaufman, George C.Customers View Bank Markets and Services: A Survey of Elkhart, Indiana. Staff Economic Studies 37. Board of Governors of the Federal Reserve System, 1967b.
Leland, Hayne and Pyle, David H. “Informational Asymmetries, Financial Structure, and Financial Intermediation.”Journal of Finance (May 1977), 371–387.
Lundsten, Lorman L. and Mandell, Lewis. “Consumer Selection of Banking Office: Effects of Distance, Services, and Interest Rate Differentials.”Bank Structure and Competition. Proceedings of a Conference at the Federal Reserve Bank of Chicago, 1977, pp. 260–286.
Pindyck, Robert S. and Rubinfeld, Daniel L..Econometric Models and Econometric Forecasts, 2nd ed. New York: McGraw-Hill, 1981.
Whitehead, David D. “The Sixth District Survey of Small Business Credit.” Federal Reserve Bank of AtlantaEconomic Review (April 1982), 42–48.
Author information
Authors and Affiliations
Additional information
Federal Reserve Bank of St. Louis
The views expressed in this article are those of the authors and do not reflect the views of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
Rights and permissions
About this article
Cite this article
Gilbert, R.A., Kochin, L.A. Local economic effects of bank failures. J Finan Serv Res 3, 333–345 (1989). https://doi.org/10.1007/BF00114049
Issue Date:
DOI: https://doi.org/10.1007/BF00114049