Local Financial Structure and Economic Resilience

Does the structure of the financial system influence the economy’s resilience to adverse shocks? Using high-frequency, U.S. county-level data on employment, small business revenue, and COVID-19 cases, we discover that employment, especially the employment of low-income workers, and the revenues of small firms fall by less in response to local COVID-19 cases in counties with a larger proportion of small banks. Furthermore, small banks increase lending to small businesses more than large banks in response to the pandemic. Evidence suggests that small banks provide countercyclical funding to small firms following an adverse shock, with positive repercussions on employment