An Empirical Study of Institutional Characteristics of Regional Financial Markets: Evidence from Rural Kentucky

This paper offers an empirical analysis of institutional characteristics of regional financial markets using rural Kentucky as the study area. The study adopts a logit model to distinguish rural Appalachian banks from rural non-Appalachian banks, using a vector of uncorrelated indices extracted from a principal component analysis of various bank behavioral and structural variables. The study finds that, compared with non-Appalachia banks, banks in Appalachia maintain a more traditional liability portfolio, demonstrate a higher degree of risk aversion by holding securities as a source of liquidity as well as income, operate in more concentrated markets, face higher barriers to enter the market, and display lower capital productivity. This study does not find evidence supporting the notion that banks in less developed regions tend to maintain a higher reserve-to-deposit ratio, and a lower commercial lending-to-asset ratio, and that the public tends to hold more in transaction accounts than in nontransaction accounts. These findings point to the need for financial development and changing asset holding by financial institutions as part of regional policy.