Community Banks and U.S. State-Level Politics

Abstract

This research examines the impact of U.S. state-level politics on bank performance during the period of 2001-2021. Past findings show that key bank performance metrics are dependent on whether banks are classified as community banks (CBs) or non-community banks (Non-CBs). This research introduces state-level political discourse into the analysis of bank performance by examining whether political affiliation of governors and/or majority of state legislatures impact the performance differences between CBs and Non-CBs. The findings show that Non-CBs post higher ROE than CBs in states governed by republicans and democrats. Further, CBs generate higher net interest margin in states governed by democrats and Non-CBs post higher net interest margins in states governed by republicans. Additionally, CBs hold more cash per dollar of total assets when located in republican-controlled states while the ratio is higher for Non-CBs in states governed by democrats. The political impact variables are highly significant in influencing bank performance metrics after controlling for the community banks designations, bank size and leverage.