Effects of Economic Policy on Rural Banks and Rural Communities: Discussion

This paper deals with two quite different themes. While both are concerned with economic institutions, the concern of each is markedly different. The primary theme deals with a theory of institutional innovation, which is related to the recent deregulation of financial institutions, to demonstrate its application in understanding how economic institutions are changed. The second theme is an analysis of the different economic consequences or impacts of alternative institutions. In this case, the performance of independent (unit) banks is compared with the performance of the affiliates of multi-bank holding companies (MBHC) in the context of rural capital markets. The initial theme applies the Davis and North theory of institutional innovation to the 1980 deregulation of financial institutions. The magnitude of the changes involved in deregulation and the multitude of groups and sectors seriously affected by it might tend to blur the identification of how this institutional change came about. The admittedly oversimplified analysis is that the large bank holding companies, as the primary action group, estimated that the benefits of deregulation exceeded the costs of achieving it and so proceeded to get this institutional innovation passed through the Congress. Large bank holding companies, unit banks, branch banking systems, savings and loans, and thrifts had watched hundreds of billions of dollars transfer from their regulated depository institutions to unregulated money market funds, etc. The agencies that insure deposits were arranging mergers to head off the chaos that could result from depository institution failures. Policy analysts felt that the Federal Reserve Board should have the monetary control aspects of the act to be more effective in controlling inflation. Millions of depositors were anxious to take advantage of the higher rates of interest without giving up government guarantees on deposits. With this array of parties vitally concerned to achieve deregulation, the process was certainly not a sharply focused or pinpointed example of institutional innovation. This is not to be interpreted as a shortcoming of the development of the concept of institutional innovation or the analysis of it presented in the paper. It is inherent in the nature and magnitude of the particular innovation under analysis. The second theme in the paper is the empirical analysis of differences in performance of holding company affiliates and unit banks. The case analysis identified several differences in operations that are the result of local management or restrictions on local management. The most important performance difference identified in the discriminant analysis is reported to be the higher ratio of agricultural loans to total loans for independent banks. This may be a negative impact of holding companies on the communities, as represented in the paper. A similar pattern of reduced agricultural lending by holding companies shows up in some other states but turns out not to be totally negative. The reduced agricultural loans are offset by increased commercial and industrial loans, primarily for small businesses. In many cases the reduction in agricultural loans can be offset by increased agricultural lending by the Farm Credit System and by unit banks aggressively pursuing new correspondent sources (through the Bank for Banks concept and through willing European agricultural correspondents). Another point of concern in the paper is the fact that unit banks must maintain a higher ratio of equity capital to assets. It is pointed out that this can inhibit a unit bank's ability to expand to meet the credit needs of the community. This is true because it is frequently Sydney D. Staniforth is a professor, Department of Agricultural Economics, University of Wisconsin.