Bank Shot: How Community Banks Sustained Consumer Spending at the Beginning of the Covid-19 Pandemic

Abstract

Using county-level consumption data collected by Chetty et al. (2024) from Affinity Solutions and federal banking data from the Federal Deposit Insurance Corporation, this paper analyzes the effect of community banks on consumer spending at the beginning of the Covid-19 pandemic. Through two-way fixed effects and event study analyses, I find that community banks had a significant and positive effect on consumer spending during this period. In a subsequent subsample analysis of counties which report initial UI claims, I surprisingly find no evidence to suggest that Paycheck Protection Program lending played a significant role in community banks’ positive consumption effects. While all these results are subject to significant limitations, including sample size and selection issues, they highlight the continued economic importance of community banks, especially during periods of economic crisis. For policymakers, these results also underscore the importance of incorporating community banks into crisis responses and of supporting a vibrant community banking industry across the United States.