Regional analysis of agricultural bank liquidity

Abstract

PurposeThe purpose of this article is to determine the regional economic factors and bank characteristics that significantly contribute to changes in bank liquidity. We also seek to identify regions that may be most susceptible to liquidity tightening.Design/methodology/approachFor this article we use data on deposits from commercial banks, Federal Reserve survey data and indicators of regional and agricultural economic conditions. We specify a panel regression with fixed effects to model how liquidity at agricultural banks has changed and to identify the most significant drivers.FindingsOur results suggest that small banks and banks with branch networks located in areas more concentrated in agricultural production bear the greatest risk of reduced liquidity.Practical implicationsPrior to the pandemic and more recently, lower deposit growth, combined with strong demand for agricultural loans, has led to reductions in liquidity at agricultural banks. Lower liquidity could reduce credit availability for farm borrowers and increase risks for banks that must rely on alternative sources of funding to meet loan demand.Originality/valuePrevious research has shown that exogenous shocks from other economic sectors, such as energy, can significantly affect bank liquidity, but research is limited on how agricultural bank liquidity is affected by downturns in the agricultural economy and other regional economic factors. Another contribution is this paper’s analysis of regional disparities in bank liquidity.