Are Community Banks a Driver of New Business Formation? Empirical Evidence from the United States from 2005 to 2015
First Faculty Advisor
Dr. Allison Kaminaga
Community banks, small Businesses; Business Formation; Dodd-Frank Act; Financial Regulation
The number of small banks in the U.S. has dropped drastically since the Global Financial Crisis (GFC) (Federal Deposit Insurance Corporation [FDIC], 2018). Small businesses, which are essential to a well-functioning economy, often rely on banks as a source of financial capital. This study helps explain if the number of community banks in a state impacts new business formation and whether financial regulation passed following the GFC, specifically the DoddFrank Wall Street Reform and Consumer Protection Act of 2010, moderates the significance of the relationship. This thesis contributes to the literature in a few major ways. First, it provides a current look at the impact of community banks on business creation by using data from before, during, and after the GFC. Second, this paper studies whether the impact of community banks on new business formation is moderated by financial regulation. Panel data from 2005 to 2015 is used to study the relationship between community banks and new business formation across U.S. states. With the fixed effects model as the preferred specification model, the results indicate that community banks have a positive and statistically significant impact on new business formation. Also, the results suggest that the Dodd-Frank Act dummy variable has a negative and statistically significant effect on new business formation, while the interaction term does not have a statistically significant moderating impact on the relationship between community banks and new business formation. Through this, the results of this study suggest that community banks are important to new business formation. A continually decreasing number of community banks across the United States could have adverse impacts on business formation and, ultimately, the economy.