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 explain up to 80 percent of the total decline in startup rate over the last decade.
Work in Progress
Community Bank Mergers and the Impact on Local Mortgage Supply
This paper uses MSA-level variation in exposure to bank mergers to test different 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 market power. 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 they were replaced by incumbent acquiring bank branches.
Foreign Currency Exposure and Bank Lending Channel: Evidence for Emerging Europe (with Isha Agarwal, UBC, and Richard Varghese, IMF)
This paper constructs a novel dataset on net foreign currency exposure of banks in emerging market economies in Europe to study how banks’ foreign currency exposure affects the transmission of exchange rate shocks to the real economy. We show that banks with net foreign currency liability exposures reduce lending following local currency depreciation. Our results are robust to the choice of foreign currency, the type of the bank, the inclusion of off-balance sheet positions, and different measures of exchange rate shocks.