Abstract
Increased competition within the financial services industry has raised concerns about the ability of small banks to adequately fund local rural development. To address these concerns, the Gramm-Leach-Bliley Act of 1999 broadened small-bank access to Federal Home Loan Bank (FHLB) financing. Statistical analyses indicate that the following factors were significantly associated with the decisions of small banks headquartered in nonmetropolitan counties to obtain FHLB membership: bank size, affiliation with a bank holding company, exposure to interest rate risk, loan portfolio quality, liquidity pressure, dividend rates on FHLB stock, and binding membership requirements related to residential real estate-related assets. Many, but not all, of these factors were also significantly associated with the membership decisions of small banks headquartered in metropolitan counties. The decisions of both nonmetropolitan and metropolitan banks to use FHLB funding is significantly related to interest rate risk exposure, liquidity pressure, and net interest margins. Neither population trend nor rural county type variables are consistently significant in explaining either which small banks join FHLBs or which member banks borrow from FHLBs.
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