Do Agricultural Activities Matter to the Efficiency of U . S . Banks ?

Popular belief holds that banking consolidation will result in a small number of large monopoly banks that can achieve substantial economies of scale and outperform small competitors. But research suggests that small banks are sometimes more efficient than their large counterparts. One competitive strategy undertaken by numerous small banks is agricultural lending. Agricultural lending is thought to benefit from micro-level monitoring to gauge whether borrowers implement scientific farming practices and exert requisite care to maximize yield and repay bank loans. We use county-level data from the 1992 Census of Agriculture to characterize agricultural banks and evaluate their lending activity on the basis of cost efficiency. Then, we also use the composition of agricultural products in each bank’s county to assemble interactions that show how banks in the region react not only to the presence of agricultural activity in their immediate surroundings, but also to farm loan activity and to recent price changes in the relevant crop mix. We find that more agricultural lending does not result in higher efficiency. However, both rural banks and urban banks tend to be susceptible to price volatility in the commodity sector.