Geography of
Finance: Research
and Outreach
January 13, 2014
presentation to the Department of Agricultural Economics
and the Southern Rural Development Center (SRDC) at
Mississippi State
by Maureen Kilkenny
Candidate for Professor and Director of the SRDC
Outline
Bio & Experience
 Geography of Finance
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 In-reach
 Research
 Outreach
Extension & Research Synergies
 Discussion
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2
Bio sketch
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Produce buyer & founding member, Davis Food Co-op, 1972-76
Chair, North Oakland Center Council, Berkeley Co-op, 1977-79
MS & PhD, U. Minnesota, Ag. and Applied Economics, 1981-87
Economist, Economic Research Service, USDA, 1987-88
Asst. Prof., Dept. of Economics, Penn State, 1989-91
Asst. Prof., Economics Institute, CU Boulder, 1991-93
Asst->Assoc. Prof., Dept. of Economics, Iowa State, 1994-2005
Prof., Dept. of Resource Economics, UNR, 2005-11
Distinguished Visiting Professor, Business School, U. Wales, 2010Senior Fellow, NCFAP, 2010Science Officer, AgConversions, 2012-
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Experience
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Tenured full professor with 22 years experience in four types of departments
Domestic and internationally known researcher and scholar
Award-winning teacher, advisor, mentor
Director of undergraduate and graduate programs, advising, curriculum,
assessment, recruitment, internships, awards, placement
Founder of two national endowed graduate fellowship programs
Founding director of three university-wide international academic exchanges
Elected chairman of a wide variety of professional associations
Dept, college P&T committee, chair; university panelist: Research; IRB;
Sponsored Programs; Curriculum; member of Faculty Senate
Longstanding partnerships with federal agencies (USDA, Fed, NSF,…)
PD on millions $ multi-state, interdisciplinary, competitively-funded research
Decades of voluntary service on local and state panels and committees
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The In-reach
^^
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5
The Questions
Wallace Foundation for Rural Research & Development
 30 counties of SW Iowa
 Farmers, bankers, business people, housekeepers
1) “How can we tell if our economic development
projects are working?”
2) “Why can’t our kids get loans so they can start
a business and stay in our small towns?”

“The banks just take our deposits and loan them to
city borrowers to get a higher rate of return.”
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Initial answers
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Network Analysis
Prairie Dog Theory of Rural Development
1 micropolitan town
67 entities
money, information, support
Graph theory
Keystone?
banks
businesses
voluntary
Gov’t
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More initial answers
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Community Reinvestment Act
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National Survey of Small Business Finance
0%
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Microfinance
5%
10%
20%
25%
20%
cash flow problems
15%
insufficient collateral
8%
business credit history
6%
5%
too little equity
Reasons for
loan denial:
15%
firm too young
repayment doubtfull
firm or loan too small
4%
firm failed criteria
large exisiting debt
regulations
loan too large for this bank
personal credit history
too far aw ay
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3%
9
Distance from Primary Creditor
1993 NSSBF Kilkenny & Kim (2000)
FREQUENCY(%)
35.0
30.0
MSA
25.0
NONMSA
20.0
15.0
10.0
5.0
0.0
0
2
4
6
8
10
20
More
than 40
MILES
About 85% of small businesses use a bank within 10 miles
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The theory of credit rationing (Stiglitz & Weiss)
Credit supply
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11
Kilkenny’s hypothesis about effects of distance:
There’s a distance
after which no loans
Credit
supply
are
made
no matter
how high the i rate
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12
Deposits
v(B↑,Q,d)
vA(A)↑
vA
distance
M’M
0
Assumption: savers are the decisive agents
deposit at this bank if value, net of costs, exceeds the alternative:
i(B) – c(F(d)/Q) ≥ vA(A)
Implications: Deposits are increasing in population and bank size,
And if costs c(F(d)/Q) are increasing and concave in distance,
 deposits convex in distance
Also, market area “M” negatively related to competition if it is localized.
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Loans
Assumptions: information is asymmetric, distance is costly, and
bankers lend to maximize their expected rate of return.
1
Q*  b1 i * td
b
1
1 
Q *
1  t
b

1

 (i * td )
0
d
b  1  b 2

 2Q *
?0
2
d
decline
convex or concave in distance
Implications: loans decline with distance from lender, and after some
distance, are no longer made
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Empirically testable hypotheses:
Common assumptions:
 Savers deposit in banks that
offer the best interest rates.
 Bankers lend to maximize their
rate of return.
 Deposit and loan markets are
nationally competitive.
Ho: No effect of distance on D or L
Ho: No effect of local competitors
on market area
 D(d) and L(d) are flat
GRFI research assumptions:
 Savers deposit in banks that
offer the best interest rates.
 Bankers lend to maximize their
expected rate of return.
 Not all deposit and loan markets
are competitive, nonmetro areas
are often monopolized.
 Distance imposes costs
 D(d) strictly convex in distance
 L(d) concave & limited
No one had ever documented D(d) or L(d) of community banks, which were
97% (3,891 of 4003) banks operating branches in the Midwest.
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Data
primary data:
secondary data:
 FDIC Institution Directory  postmarked invitation to each
location executive
 Census population in zip
 Use your bank software to
code areas
generate:
 proportional sample of
 sum of deposits from each zip
active commercial bank
 sum of loans to each zip area
offices (size x pop)
 Return the file by email
 six Midwestern states
 We generate and send you
 GIS
choropleth maps of your own
deposit and loan market
areas
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1.00
Statistically significant evidence against the nulls
ln(share of total)
0.10
D(d) strictly convex in distance, and
L(d) concave & limited
… as hypothesized
0.01
Deposits
Loans
0.00
0.00
0.00
0
20
40
60
80
100
120
miles from branch office to transactor
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Practical implications:
Science-based answers to the WFRR&D questions, and more:
1. Banks funnel loans INTO rural towns. Bank lending is almost wholly
contained within an hour’s drive from the branch office. In contrast,
deposits (CDs) are acquired from coast-to-coast.
2. No-one without experience, collateral, cash flow history… gets a bank
loan to start a business anywhere.
3. Local bankers are essential in community networks for sustainability.
4. Local bankers who do these things run more profitable bank branches.
5. It doesn’t matter where the bank HQ is located.
6. Because face-time matters, brick-and-mortar offices and community
banks are likely to continue to be the main sources of external finance
for established non-metro and small businesses, despite the existence
of credit scoring and e-finance alternatives.
7. Explains why there are more bank offices than grocery stores today.
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Preparing the FDIC data on 4,000 bank firms with 75,000 bank offices to
measure ‘local competition” for the empirical tests (above) provided a nice
piece of “market research” … showing counties where the firms are profitable
and there are few offices. The red counties are where bank firms might
consider opening a new branch. (2005 Outstanding Article Award Winner)
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Extension & Research Synergies
In-reachResearchExtension
(1) satisfied clients and partners
(2) learning opportunities for students
(3) high-quality peer-reviewed research
(4) new grant proposals
(5) new Extension materials
effective rural development?
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Discussion
Bio & Experience
 Geography of Finance
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 In-reach
 Research
 Outreach

Extension & Research Synergies
23 total slides
23
Thank you!
Bank types with branches in the US Midwest, 2002
3,891 “community” banks
47% metro HQ & non-ag
+ 112 “large” banks
1,607 “Ag” banks
60% metro HQ
40% “rural” HQ
1,363 ”rural community” banks
70% “Ag”
30% non-ag
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