Big Banks versus Agricultural Banks: Has Too‐Big‐To‐Fail Regulation Affected Efficiency and Scale Economies Measures?

Abstract

The Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010 aimed to improve the financial stability of the banking industry. This reform was intended to reduce the too‐big‐to‐fail practices for very large banks. However, it might also affect the performance of relatively small asset size banks with different lending portfolios. Using the Call Report data from 2006 to 2016, evidence suggests that the Dodd‐Frank Act has affected the estimates of cost efficiency and returns to scale measures of both big banks and small agricultural banks. Results indicate that Dodd‐Frank Act has increased cost efficiency, discouraged mergers, and encouraged product specialization for banks above the $50 billion asset size. However, none of these results hold for the banks just above the $10 billion asset size. This appears to suggest that Dodd‐Frank Act has mainly affected the economic measures of those very big banks that are subject to the more stringent regulations. Nevertheless, Dodd‐Frank has reduced agricultural banks' cost efficiency and increased incentives for mergers. In addition, the Dodd‐Frank Act has dampened the incentives for product diversification in agricultural banking. Likewise, evidence exists that this act has slowed productivity growth, efficiency, and technological change in agricultural banks. Taken together, Dodd‐Frank reduced consolidations in very big banks that are subject to greater oversight but adversely affected U.S. agricultural lending.

Agricultural bank acquisitions and postacquisition performance: An examination of the role of shared knowledge

“…To ensure that the findings are consistent with different sample sets, we conducted two additional robustness tests with different sample data. In the first set of robustness tests, following Regmi et al (2021), we ran separate tests for banks that acquire a bank with at least $10 million agricultural loans. This resulted in a significant reduction in bank‐year observations.…”

“…Small bank survivorship and healthy competition has benefitted the US agricultural sector as well, but concerns have been raised as the number of agricultural banking institutions decreased over the years. Furthermore, recent studies on new bank regulations such as the Dodd‐Frank Act and Basel III capital regulation would likely cause increases in incentives for bank consolidations (K. N. Kim & Katchova, 2020; Regmi et al, 2021). In light of such concerns, our study examines the implications of agricultural bank acquisitions using bank‐level data.…”

“…They demonstrated that the increase in bank competition has benefitted US agricultural producers. While not strictly focusing on the implications of banking consolidation, Regmi et al (2021) examine the effects of the Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010 after the Great Recession and demonstrated that incentives for consolidation have increased following new regulation. Regmi and Featherstone (2021), whose study is probably the most closely related to the research presented in this study, used Lerner's Index as a proxy for market power and concentration to show that bank competition has a U‐shaped effect on the probability of default and an inverted U‐shaped effect on agricultural lending volume.…”

Nontraditional lenders and access to local agricultural credit markets by beginning and female farmers

“…Farmers' access to credit may be affected by the closings of commercial bank branches driven by trends unrelated to agriculture such as decrease in demand for banking services due to depopulation of some areas (Hinton et al, 2017) or deteriorated economic conditions following crises (Freshwater, 1997;Morgan et al, 2016). Moreover, the implementation of Dodd-Frank legislation decreased the incentives of commercial banks to specialize in agricultural lending (Regmi et al, 2020). Thus, farmers located in sparsely populated areas might have more limited access to lending facilities and fewer options to get credit.…”

“…, 2016). Moreover, the implementation of Dodd-Frank legislation decreased the incentives of commercial banks to specialize in agricultural lending (Regmi et al. , 2020).…”