Bank performance and general specialization vs agricultural loan specialization: an analysis of US banks

Purpose The effects of bank lending specialization are unclear. To explore this issue, we contrast the performance effects of general lending specialization and agricultural specialization. The latter is important given small or community banks account for a significant share of all agricultural lending, while the number of such banks continues to shrink. Design/methodology/approach This article develops a novel measure of general lending specialization for the percentage of loans that could be shifted across seven categories to mimic market allocations. Using US government data, we analyze small-, medium- and large-sized banks for four performance indicators in random effects regressions for 2011–2019, with four sets of subsidiary analyses. Findings Results suggest specialized lending reduces risk for small, community banks, and that large-sized banks face a risk-reward trade-off such that general specialization improves returns, but increases risk. Agricultural lending is associated with improved returns and lower risk for small-sized banks, particularly in rural locations, but with poorer performance for large-sized banks. Analyses of bank performance around the global financial crisis and COVID-19 pandemics suggest these were black swan events. Overall results suggest that both general lending specialization and agricultural specialization warrant separate analytical treatment and that small, community banks continue to play a crucial role in the US economy. Originality/value This is the first article to contrast general and agricultural lending, and across small-, medium- and large-sized banks, finding distinct effects. Future studies of other types of lending specialization are warranted.