Effect of Compliance Cost on the Supply of Bank Credit to Agriculture: A Differential Approach

Abstract

The supply of credit to agriculture in the United States has been affected by a variety of financial regulations over time. One recent regulatory change is the Dodd-Frank Act in 2010 that includes the Ability-to-Repay rule increasing the operating costs of banks. Although the rule increases the safety of the bank's portfolio, it requires more compliance costs to verify borrower's income status. Given that the verification of the ability to repay increases the costs of lending to all banks, this study examines the effects of bank regulations adding the compliance costs on small or community-oriented banks. From the framework of multiproduct firm, we estimate the differential input demand and output supply systems to identify the banks' behavioral changes due to the compliance costs. The results indicate that changes in lending and input use have occurred due to the imposition of the compliance costs.