Geography of Finance: Research and Outreach

1. Geography of Finance: Research and Outreach January 13, 2014 presentation to the Department of Agricultural Economics and the Southern Rural Development Center (SRDC) at Mississippi State by Maureen Kilkenny Candidate for Professor and Director of the SRDC

2. Outline • Bio & Experience • Geography of Finance • In-reach • Research • Outreach • Extension & Research Synergies • Discussion 23 total slides

3. Bio sketch • Produce buyer & founding member, Davis Food Co-op, 1972-76 • Chair, North Oakland Center Council, Berkeley Co-op, 1977-79 • MS & PhD, U. Minnesota, Ag. and Applied Economics, 1981-87 • Economist, Economic Research Service, USDA, 1987-88 • Asst. Prof., Dept. of Economics, Penn State, 1989-91 • Asst. Prof., Economics Institute, CU Boulder, 1991-93 • Asst->Assoc. Prof., Dept. of Economics, Iowa State, 1994-2005 • Prof., Dept. of Resource Economics, UNR, 2005-11 • Distinguished Visiting Professor, Business School, U. Wales, 2010- • Senior Fellow, NCFAP, 2010- • Science Officer, AgConversions, 2012- 23 total slides

4. Experience • Tenured full professor with 22 years experience in four types of departments • Domestic and internationally known researcher and scholar • Award-winning teacher, advisor, mentor • Director of undergraduate and graduate programs, advising, curriculum, assessment, recruitment, internships, awards, placement • Founder of two national endowed graduate fellowship programs • Founding director of three university-wide international academic exchanges • Elected chairman of a wide variety of professional associations • Dept, college P&T committee, chair; university panelist: Research; IRB; Sponsored Programs; Curriculum; member of Faculty Senate • Longstanding partnerships with federal agencies (USDA, Fed, NSF,…) • PD on millions $ multi-state, interdisciplinary, competitively-funded research • Decades of voluntary service on local and state panels and committees 23 total slides

5. The In-reach ^^ 23 total slides

6. The Questions Wallace Foundation for Rural Research & Development • 30 counties of SW Iowa • Farmers, bankers, business people, housekeepers • “How can we tell if our economic development projects are working?” • “Why can’t our kids get loans so they can start a business and stay in our small towns?” • “The banks just take our deposits and loan them to city borrowers to get a higher rate of return.” 23 total slides

7. Initial answers • Network Analysis Prairie Dog Theory of Rural Development 1 micropolitan town 67 entities money, information, support Graph theory Keystone? banks businesses voluntary Gov’t 23 total slides

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9. More initial answers • Community Reinvestment Act • National Survey of Small Business Finance • Microfinance Reasons for loan denial: 23 total slides

10. About 85% of small businesses use a bank within 10 miles 23 total slides

11. The theory of credit rationing (Stiglitz & Weiss) Credit supply 23 total slides

12. Kilkenny’s hypothesis about effects of distance: There’s a distance after which no loans are made no matter how high the i rate Credit supply 23 total slides

13. Deposits v(B↑,Q,d) vA(A)↑ vA 0 distance M’M Assumption: savers are the decisive agents deposit at this bank if value, net of costs, exceeds the alternative: i(B) – c(F(d)/Q) ≥ vA(A) Implications: Deposits are increasing in population and bank size, And if costs c(F(d)/Q) are increasing and concave in distance,  deposits convex in distance Also, market area “M” negatively related to competition if it is localized. 23 total slides

14. Loans Assumptions: information is asymmetric, distance is costly, and bankers lend to maximize their expected rate of return. decline convex or concave in distance • Implications: loans decline with distance from lender, and after some distance, are no longer made 23 total slides

15. Common assumptions: Savers deposit in banks that offer the best interest rates. Bankers lend to maximize their rate of return. Deposit and loan markets are nationally competitive. Ho:No effect of distance on D or L Ho: No effect of local competitors on market area  D(d) and L(d) are flat GRFI research assumptions: Savers deposit in banks that offer the best interest rates. Bankers lend to maximize their expected rate of return. Not all deposit and loan markets are competitive, nonmetro areas are often monopolized. Distance imposes costs  D(d) strictly convex in distance  L(d) concave & limited Empirically testable hypotheses: No one had ever documented D(d) or L(d) of community banks, which were 97% (3,891 of 4003) banks operating branches in the Midwest. 23 total slides

16. secondary data: FDIC Institution Directory Census population in zip code areas proportional sample of active commercial bank offices (size x pop) six Midwestern states GIS primary data: postmarked invitation to each location executive Use your bank software to generate: sum of deposits from each zip sum of loans to each zip area Return the file by email We generate and send you choropleth maps of your own deposit and loan market areas Data 23 total slides

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19. Statistically significant evidence against the nulls D(d) strictly convex in distance, and L(d) concave & limited … as hypothesized 23 total slides

20. Practical implications: Science-based answers to the WFRR&D questions, and more: • Banks funnel loans INTO rural towns. Bank lending is almost wholly contained within an hour’s drive from the branch office. In contrast, deposits (CDs) are acquired from coast-to-coast. • No-one without experience, collateral, cash flow history… gets a bank loan to start a business anywhere. • Local bankers are essential in community networks for sustainability. • Local bankers who do these things run more profitable bank branches. • It doesn’t matter where the bank HQ is located. • Because face-time matters, brick-and-mortar offices and community banks are likely to continue to be the main sources of external finance for established non-metro and small businesses, despite the existence of credit scoring and e-finance alternatives. • Explains why there are more bank offices than grocery stores today. 23 total slides

21. Preparing the FDIC data on 4,000 bank firms with 75,000 bank offices to measure ‘local competition” for the empirical tests (above) provided a nice piece of “market research” … showing counties where the firms are profitable and there are few offices. The red counties are where bank firms might consider opening a new branch. (2005 Outstanding Article Award Winner) 23 total slides

22. Extension & Research Synergies In-reachResearchExtension • satisfied clients and partners • learning opportunities for students • high-quality peer-reviewed research • new grant proposals • new Extension materials effective rural development? 23 total slides

23. Discussion • Bio & Experience • Geography of Finance • In-reach • Research • Outreach • Extension & Research Synergies 23 total slides

24. Thank you!

25. Bank types with branches in the US Midwest, 2002 + 112 “large” banks 3,891 “community” banks 47% metro HQ & non-ag 1,607 “Ag” banks 60% metro HQ 40% “rural” HQ 1,363 ”rural community” banks 70% “Ag” 30% non-ag 23 total slides