Meeting Technologies and Optimal Trading Mechanisms in Competitive Search How Do Exogenous Shocks Cause Bankruptcy? Balance Sheet and Income Statement Channels

s of research papers produced by the economists at the Philadelphia Fed Research Rap www.philadelphiafed.org Economists and visiting scholars at the Philadelphia Fed produce papers of interest to the professional researcher on banking, financial markets, economic forecasting, the housing market, consumer finance, the regional economy, and more. More abstracts may be found at www.philadelphiafed.org/ research-and-data/publications/research-rap/. You can find their full working papers at http://www.philadelphiafed.org/research-and-data/publications/working-papers/. Business Review Q3 2014 23 Meeting Technologies and Optimal Trading Mechanisms in Competitive Search Markets In a market in which sellers compete by posting mechanisms, the authors allow for a general meeting technology and show that its properties crucially affect the mechanism that sellers select in equilibrium. In general, it is optimal for sellers to post an auction without a reserve price but with a fee, paid by all buyers who meet with the seller. However, the authors define a novel condition on meeting technologies, which they call invariance, and show that meeting fees are equal to zero if and only if this condition is satisfied. Finally, the authors discuss how invariance is related to other properties of meeting technologies identified in the literature. 14-15. Benjamin Lester, Federal Reserve Bank of Philadelphia; Ludo Visschers, University of Edinburgh and Universidad Carlos III; Ronald Wolthoff, University of Toronto. The Evolution of U.S. Community Banks and Its Impact on Small Business Lending There have been increasing concerns about the declining number of community banks and that the acquisitions of community banks by larger banks might result in significant reductions in small business lending (SBL) and disrupt relationship lending. This paper examines the roles and characteristics of U.S. community banks in the past decade, covering the recent economic boom and downturn. The authors analyze risk characteristics (including the confidential ratings assigned by bank regulators) of acquired community banks, compare preand post-acquisition performance and stock market reactions to these acquisitions, and investigate how the acquisitions have affected small business lending. The authors find that community banks that were merged during the financial crisis period were mostly in poor financial condition and had been rated as unsatisfactory by their regulators on all risk aspects. They also find that the ratio of SBL lending to assets has declined (from 2001 to 2012) for all bank size groups, including community banks. The overall amount of SBL lending tends to increase when the acquirer is a large bank. The authors’ results indicate that mergers involving community bank targets so far have enhanced the overall safety and soundness of the overall banking system and that community bank targets are willing to accept a smaller merger premium (or even a discount) to become a part of a large banking organization. Overall, the decline in the number of community banks during this period does not appear to have adversely impacted SBL lending, and larger bank acquirers have tended to step in and play a larger role in SBL lending. Working Paper 14-16. Julapa Jagtiani, Federal Reserve Bank of Philadelphia; Ian Kotliar; Rutgers University; Ramain Quinn Maingi, Rutgers University. How Do Exogenous Shocks Cause Bankruptcy? Balance Sheet and Income Statement Channels The authors are the first to examine whether exogenous shocks cause personal bankruptcy