Banks' Geographic Expansion: New Location, Same Old Neighbours

Abstract: This paper explores how information frictions shape banks' geographic expansion. Theory suggests that, despite the removal of legal restrictions, information asymmetry can still hinder bank entry into the newly deregulated markets. The presence of "familiar" firms can potentially alleviate this issue. Leveraging the US interstate banking deregulation as a natural experiment and comprehensive data on locations of bank branches and firm establishments, I find that banks are indeed more likely to expand to new locations with a stronger presence of "familiar" firms. Firms are "familiar" if they already have operations in the bank's original neighbourhoods. And I confirm, with a novel dataset combining corporate loans with information on borrower and lender locations, that the banks likely have financial interactions with their neighbouring firms. The paper further documents that banks' lending patterns in the deregulated regions mirror the information-constrained entry patterns, as credit provision is closely associated with branch locations. Furthermore, due to various informational barriers to entry, the statewide deregulation may not benefit all regions and firms equally. Areas where more entities are "known" to out-of-state banks experience more entries and higher employment growth. Small businesses may not benefit as much as large firms. These findings highlight the potential limitations of banking deregulation and offer policy guidance for more effective and equitable financial reforms.
Working Paper

The Financial Transmission of Trade Shocks: Household Credit Channel

Abstract: How do trade shocks affect non-tradable sectors? Banks may play a role. US banks located in areas with higher exposure to import competition from China experience slower growth in deposits and limit their lending to households. Contracted household demand in turn impacts employment in the local non-tradable sectors.

Capital Injection: Live Long and Wither

Abstract: Does government bailout save banks in crisis? US banks who received capital injections from the Treasury's Capital Purchase Program had a lower failure rate than non-recipients in the short run, but quickly caught up after the peak of the crisis. Recipients also had a substantially higher chance of being acquired, possibly due to political pressures and management inefficiency, resulting in a higher overall exit rate.