The regional distribution of bank closings in the United States: an extension of the Amos analysis.

• Author: Cebula, Richard J.
• Position: Communications

1. Introduction

   In a recent study, Amos [1, 805] empirically ". . . seeks to identify the critical factors causing the regional differentiation of bank closings between 1982 and 1988." According to Amos [1, 805], the study is motivated by ". . . the ultimate objective of preventing future bank closings." The Amos analysis is original in its addressing of the heretofore largely ignored issue of the causes of interregional bank closing rate differentials. The analysis is well written, well motivated, and certainly very relevant to contemporary public economic policy. Moreover, it provides useful initial insights into the issue at hand.

   The present study seeks to extend the analysis initiated by Amos to make an even more useful product. To achieve this goal, the present study examines a variety of alternative variables to most of those chosen by Amos. In addition, we extend the empirical technique adopted by Amos, which is an OLS estimation, by correcting for heteroskedasticity. Finally, we also update (extend) his analysis to run through the year 1992.

2. The Amos Analysis

   Amos estimates a reduced-form equation in which the percentage of banks that were closed in a state over the 1982-88 period, BCPB, is treated as a function of GSP (the level of gross state product in 1980), DMUN (a binary dummy variable for states with unit branch banking regulations in effect in 1980), DMST (a binary dummy variable for states with state-wide branch banking regulations in effect in 1980), EGP (the percentage of state product derived from oil and natural gas extraction in 1980), AGP (the percentage of gross state product derived from agriculture in 1980), MGP (the percentage of gross state product derived from manufacturing in 1980), GAR (the average annual growth rate of gross state product over the period 1963-1986), GDR (the difference between the average annual growth rates of gross state product for 1975-1980 and 1980-1985), and GVR (the variance of the average annual growth rate of gross state product for the period 1963-1986).

   According to Amos [1, 813-14], variable GSP is intended to capture the impact of larger, more robust state economies, DMST and DMUN test for state branch-banking regulations, and EGP, AGP, and MGP test for the economic base effect. The variables GAR, GDR, and GVR are intended to test for instability in the states' economies.

   The resulting reduced-form equation is estimated by OLS. The results are mixed. The GSP variable is significant but with the wrong sign. The two dummy variables, DMUN and DMST, are both positive but not significant at the five percent level. EGP is significant with the expected sign, implying that states with a larger proportion of their state product deriving from oil and natural gas extraction had a higher bank closing rate. This is logical in view of the severe oil price declines during the 1980-1986 time period and the economic havoc resulting therefrom, especially in the Southwest. Variables AGP, MGP, and GAR are not statistically significant, with GAR having the wrong sign. Variables GDR and GVR are significant, implying that states with relatively more rapid growth in the early 1980s than in the late 1970s had fewer bank closings whereas states with more volatile gross state product growth rates had more bank closings.

   The present study makes three extensions of the Amos analysis. The first involves extending the time period examined in the study through the end of 1992 in order to make the time frame more current. We observe that for the time period examined in the Amos study, 1982-1988, there are 50 observations on the dependent variable (BCPB). Of these 50 observations on the dependent variable, ten had a value of zero, so that the model in Amos is dealing with "censored data." To deal with censored data, it technically is appropriate to estimate using the TOBIT model rather than OLS. However, in extending Amos, the present study deals with a longer and more current time period: 1982-1992. Over this longer time period, there were one or more bank closings in all 50 states; therefore, in our estimation, we can in fact appropriately use the OLS estimation technique. The second extension of Amos involves correcting for heteroskedasticity; this...