This study examines how community banks and credit unions helped communities and local economies weather the Great Recession. Over the past three decades, American banking abandoned its traditional roots and practices. As it shed regulatory oversight, it concentrated assets in a handful of giant, national or global banking corporations, and shifted away from "boring banking" practices (taking deposits and making and holding loans) toward market-based banking involving derivatives trading and the creation and sale of new financial instruments. With these changes came a growing disconnect between banks and local economies, and an extraordinary run up in debt and risk within the financial system, setting the stage for crisis. Yet community banks and credit unions continued to play vital roles in the US economy, providing consumers, small business and working families with access to nearly 14,000 smaller, locally owned and operated, and even cooperatively organized banks. These institutions participated less, if at all, in derivatives and securities trading. They sustained close ties to their communities, and remained committed and organized internally to serving clients and those communities rather than just pursuing shareholder value, and related to local economies differently from banks like CITI or JP Morgan Chase. Using new data on the American economy from 1994 to 2013, this study will analyze the effects of community banks and credit unions on communities, local economies, and their capacities to sustain employment, vibrant small business sectors, new business formation, and recovery. Through these analyses, this study will contribute new knowledge about how different kinds of banking and the organization of finance affect community resilience and local economic performance in the face of crises. It will also identify new avenues for reform, including supplementing traditional regulation of "too-big-to-fail" banks with policies that support smaller, more local community based and cooperative financial institutions.
This study will develop and test hypotheses about the effects of community banks and credit unions on four key outcomes within local economies in the United States: new business formations, the size and changes in the share of the small business sector, income inequality, and the spike and recovery in unemployment through the Great Recession. The study will mine economic sociology and the sociology of finance for hypotheses about how the social structure of finance affects banking practices and local economies, exploiting theory about two key dimensions of finance. It will focus on: 1) the organizational structure of banks, developing the insight that small, locally owned and operated or cooperatively owned banks are less likely to abandon their communities and clients in the pursuit of shareholder value; and 2) the type of the exchange relations between banks and clients, developing the insight that banks that engage in relational lending practices and sustain close, ongoing or embedded ties with borrowers will relate quite differently to clients and local economies than banks that rely mainly on abstract risk rating and arm's length, transactional bank practices. The study will then test these hypotheses using time series analyses of annual, county- and Metropolitan Statistical Areas-level data on the banking, organizational, and economic structure of local economies from 1994 through 2013. The results of these analyses will advance sociological research on finance by going beyond its focus on money-center banks, trading rooms in currency and derivatives markets, and the dyadic relations between banks and clients to document quantitatively and more broadly how relational banking and the organizational structure of banks affect local economies. The results will also deepen links between economic and urban sociology by tracing how social structures of finance and ties between banks and communities shape community resilience in the face of crisis.
