Working Papers

Lending Terms and Industry Dynamics: the Role of Small Banks (JMP)

The US banking sector has undergone substantial consolidation and increasing concentration over the last few decades. Over the same period, the startup rate of the US economy has declined. This paper studies the link between bank consolidation and the slow down of US business dynamism. A shift in the size distribution of banks affects firms’ financing conditions as banks of different sizes differ in lending criteria. Using newly matched loan-level data, I show that borrower credit ratings are more strongly associated with loan rates for large bank lenders compared to small bank counterparts. The disparity in price patterns is consistent with different information usage of large and small banks. In particular, small banks rely less on standardized credit measures, making them an important source of credit to small startups than large banks. I then build a general equilibrium model with heterogeneous lenders and borrowers, where borrowers choose whether to become a worker or to operate a firm and decide its optimal capital structure. With endogenous occupation and capital structure choices, a shift in banking sector size distribution can have differential impact on financing conditions of firms with different size, age, and wealth. A quantitative exercise using a calibrated model suggests that bank consolidation may lead to a significant decline in startup rate by increasing the relative cost of funds faced by younger firms.

Foreign Currency Exposure and Bank Lending Channel: Evidence for Emerging Europe (with Isha Agarwal, UBC, and Richard Varghese, IMF)

This paper constructs a novel bank level dataset on foreign currency denominated assets and liabilities in emerging market economies in Europe to study how banks’ foreign currency exposure affects the transmission of exchange rate shocks to the real economy. Using bank balance sheet data, we show that following home currency depreciation banks with net foreign liabilities lend less relative to banks without net foreign liabilities. This reduction in lending growth is economically significant with an average home currency depreciation during the sample period associated with 5 percentage point lower loan growth for banks with net foreign currency liabilities. Our results are robust to alternate econometric specifications and measures of foreign currency exposure, the choice of foreign currency, and banks’ ownership type. The inclusion of off-balance sheet positions that could be utilised to hedge foreign currency exposure too does not affect our results.

Work in Progress

Community Bank Mergers and the Impact on Local Mortgage Supply

This paper uses MSA-level variation in the exposure to bank mergers to test potential channels through which bank mergers affect local credit supply, including the loss of local information from branch closings, the change in affected banks’ organizational structure, and the change in local market power of involved banks. The type of mergers and the market share of affected branches determine the sign and magnitude of correlations between bank mergers and loan characteristics. I document that bank mergers are associated with lower loan spreads, higher borrower credit scores, and lower loan-to-value ratios on average. My results suggest that the correlation is strongest if there were branch closings resulting from mergers, especially when the closed branches are replaced with incumbent branches of acquiring banks.