The geographic flow of bank funding and access to credit: Branch networks, local synergies and competition

TL;DR

This paper investigates how geographic distribution of bank branches and market competition influence the flow of credit, revealing that these factors significantly impact access to loans, especially benefiting wealthier regions.

Contribution

It introduces a new methodology to measure geographic credit imbalance and models the effects of branch networks and competition on credit flow using novel data.

Findings

Branch networks and competition significantly affect credit flow.

Imbalances favor more affluent markets.

Counterfactuals show branch and competition effects are substantial.

Abstract

Geographic dispersion of depositors, borrowers, and banks may prevent funding from flowing to high loan demand areas, limiting credit access. Using bank-county-year level data, we provide evidence of the geographic imbalance of deposits and loans and develop a methodology for investigating the contribution to this imbalance of branch networks, market power, and scope economies. Results are based on a novel measure of imbalance and estimation of a structural model of bank competition that admits interconnections across locations and between deposit and loan markets. Counterfactual experiments show branch networks and competition contribute importantly to credit flow but benefit more affluent markets.