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Economy

Economic Resources and Rural Credit Markets

Economic resources are those financial assests a community can draw upon to further local development, on an individual or business level.

The State of Rural Credit Markets: An Example From the Midwest

Excerpted from: Kilkenny, Maureen and Robert Jolly. 2005. Are Rural Credit Markets Competitive? Is There Room for Competition in Rural Credit Markets? Choices 20(1): 25-29.

"How hot is the competition in rural credit markets? If it's not hot enough, we could expect credit rationing that limits economic growth. If it is too hot, there is a risk of declining credit quality and failure of financial institutions, which would also limit growth...

"Rural credit markets are often fraught with inefficiencies. Remoteness--frequently in association with poorly defined property rights, rule of law, and poverty--can make it difficult to extend credit to rural households, farms, or firms. This problem is widespread in developing and transitional economies. And, historically, it has been a problem in rural areas in the United States--one that has been dealt with by creating unique rural lending institutions, public policies, and other interventions...

"A recent review by economists at the USDA's Economic Research Service pointed out that the average rate of return on rural-headquartered bank assets has been systematically higher than the return on urban bank assets. The review presented a number of indicators suggesting that rural credit markets may be less than perfectly competitive. Rural banks charge higher interest rates on loans, pay lower interest rates on deposits, and take fewer risks. The authors argued, however, that the small size of rural communities and the low number of rural borrowers might limit the number of lenders that can profitably compete in rural counties...

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"Distance insulates rural banks from competition, so even smaller, less efficient banks may thrive there. Distance can also insulate high-profit banks from competition. Even if there are no barriers to entry (other than fixed costs), space imparts market power because lenders can afford to charge nearby customers higher rates without fear of losing them to more distant competitors, because distance increases the costs of monitoring loans. By the same token, the proximity of the lender to the borrower, and their participation in the same social networks or community institutions can improve opportunities for loan origination and make applicant screening and monitoring more efficient. Relationship lending has been shown to be essential to a bank's competitiveness (Moss, Barry, & Ellinger, 1997)...

"[In 12 Midwestern states] We found significant evidence of room for more competition in credit markets. Banks that control larger shares of the deposits in the counties in which they have offices have earned above-normal profits. This evidence is consistent with the hypotheses that the market power rural banks have is exploitable. Banks with superior management or production technologies who are insulated from competition by distance, or who differentiate their financial products, have been able to exercise and profit from market power in the Midwest. The percent of loans to farmers or backed by farmland also supports higher profits for commercial banks...

"All our analyses showed that regardless of their size, headquarters location, or other characteristics, banks that specialize in farm lending are more profitable. In the presence of barriers to entry, this is consistent with a hypothesis that banks providing farm credit engage in credit rationing towards farmers and away from nonfarm borrowers, as shown by Turvey and Weersink (1997). Coupled with the evidence in Collender and Shaffer (2003) that farming-dependent county income growth is more sensitive to local bank firm concentration, it suggests a hypothesis that agricultural credit demands may crowd out nonfarm demands for bank loans in farming dependent rural areas. It also suggests that there is room for more of both farm and nonfarm lending in the rural Midwest."

Explore on Your Own!

Are the credit resources adequate in your county? What are the trends in the number of open bank branches and offices?

Launch the Oregon Communities Reporter Tool

Economic-Related Terms

You can use the Oregon Communities Reporter to explore the economic resources of an area by using the following statistics:

  • Number of Commercial Banks: Includes commercial banks insured by the FDIC. These institutions are regulated by one of the three Federal commercial bank regulators (FDIC, Federal Reserve Board or Office of the Comptroller of the Currency). They submit financial reports to the Federal Reserve (state member banks) or the FDIC (state non-member banks and national banks).
    Source: Federal Deposit Insurance Corporation Summary of Deposits

  • Offices of Commercial Banks: A branch/office is any location, or facility, of a financial institution, including its main office, where deposit accounts are opened, deposits are accepted, checks paid, and loans granted. Some branches include, but are not limited to, brick and mortar locations, detached or attached drive-in facilities, seasonal offices, offices on military bases or government installations, paying/receiving stations or units, and Internet and Phone Banking locations where a customer can open accounts, make deposits and borrow money.
    Source: Federal Deposit Insurance Corporation Summary of Deposits

  • Deposits in Commercial Banks: Amount of deposits (in millions of dollars).
    Source: Federal Deposit Insurance Corporation Summary of Deposits

  • Number of Savings Institutions: Includes FDIC-insured savings institutions that operate under state or federal banking codes applicable to thrift institutions. These institutions are regulated by and submit financial reports to one of two Federal regulators (FDIC or Office of Thrift Supervision).
    Source: Federal Deposit Insurance Corporation Summary of Deposits

  • Offices of Savings Institutions: A branch/office is any location, or facility, of a financial institution, including its main office, where deposit accounts are opened, deposits are accepted, checks paid, and loans granted. Some branches include, but are not limited to, brick and mortar locations, detached or attached drive-in facilities, seasonal offices, offices on military bases or government installations, paying/receiving stations or units, and Internet and Phone Banking locations where a customer can open accounts, make deposits and borrow money.
    Source: Federal Deposit Insurance Corporation Summary of Deposits

  • Deposits in Savings Institutions: Amount of deposits (in millions of dollars).
    Source: Federal Deposit Insurance Corporation Summary of Deposits

Sources

Kilkenny, Maureen and Robert Jolly. 2005. Are Rural Credit Markets Competitive? Is There Room for Competition in Rural Credit Markets? Choices 20(1): 25-29.

Compiled by Mindy Crandall, Faculty Research Assistant, Oregon State University Extension Service (2008)