consequences of this flow for the national economy.<sup>2Evenif healthy community banks tendto channelmore</sup> credit to SMEs, this may not translate into higher economic<sup>growth if the credit flows to SMEs are ineffective,or</sup> if there are significant adverse consequences of<sup>the relatively poor health of other (non-community)banks.3</sup> Second, our international orientation and application<sup>to many developed and developing nations differs</sup> from the traditional focus of community banking<sup>studies on a single developednation.We acknowledgethat as in</sup> any study involving international comparisons, some<sup>rather heroic assumptions are needed, because one cannot</sup> control for the many differences in culture, markets,<sup>regulatory structures,and data collectionstandards across</sup> nations. We try to mitigate these problems through<sup>themeansnotedabove-1) analyzingdevelopedand</sup> developing nations separately, 2) using measures of<sup>community banking healthrelative to other banks within the</sup> same nation, and 3) including controls for other important<sup>nationaldifferences.</sup> Third, we allow for different potential definitions of<sup>community banksin our empiricalanalysis,rather</sup> than defining them one way. For developed<sup>nations,weusetheconventionaldefinition-small, private,</sup> domestically-owned institutions - based on the<sup>researchthatsuggests thatthesebankshavecomparative</sup> advantages in lending to SMEs, a core function of<sup>community banks.For developing nations,we allow for the</sup> possibility that state-owned banks and foreign-owned<sup>banksmay also function as community banks when small,</sup> private, domestically-owned banks have difficulty<sup>providing sufficient credit.The market penetrationsof state-</sup> owned and foreign-owned banks are substantial<sup>inmany countriesaround the world,andthere are oftenlarge</sup> differences in the shares of these banks across countries<sup>withinthesameregion.For example, assetsat state-</sup> owned banks are 52% of the total in Brazil versus<sup>12%in Chile,whereas foreign-ownedbanking assets are only</sup> 17% of the total in Brazil versus 32% in Chile<sup>(Barth,Caprio, andLevine2001).As discussedbelow, state-</sup> owned and foreign-owned institutions may be able<sup>to overcomesome of their disadvantagesin SME lending by</sup> using government subsidies, by organizing in<sup>a decentralized fashion,orby usingsuperior technologies.</sup> Finally, we include the average efficiency ranks of community<sup>banks as well as the market shares ofthese</sup> institutions. Community banking research often<sup>focuseson the share or quantity effectof thesebanks without</sup>

> 2 few studies do directly examine the economic consequences<sup>of community banking.One study finds that deregulation of</sup> geographic restrictions on intrastate and interstate<sup>banking by U.S.states raised the rates of new-business incorporationsin</sup> these states (Black and Strahan 2002). Another study<sup>finds that reductions in capital at small banks in U.S. states during the</sup> early 1990s credit crunch led to significant reductions<sup>in the employmnent,payroll, and number of small businessesin these</sup> states (Hancock and Wilcox 1998).

3One study does find positive associations between<sup>the SME employment ratio and both economic growth and development</sup> (Beck, Demirgtlc-Kunt, and Levine 2003a).

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