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Branching Networks and Geographic Contagion of Commodity Price Shocks

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Abstract

This paper studies the role of banks' branching networks in propagating the oil shocks. Banks that were exposed to the oil shocks through their operations in oil-concentrated counties experienced a liquidity drainage in the form of a declining amount of demand deposit inflow as well as an increasing percentage of troubled loans. Banks were forced to sell liquid assets, and contracted lending to small businesses and mortgage borrowers in counties that were not directly affected by the oil shocks. The effect is magnified when banks do not have strong community ties, but is mitigated if banks' branching network is sufficiently dispersed. I also find the decline in local credit supply cannot be completely offset by healthy competing banks' increased lending, providing fresh evidence from the perspective of bank competition.

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  • Teng Wang, 2020. "Branching Networks and Geographic Contagion of Commodity Price Shocks," Finance and Economics Discussion Series 2020-034, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2020-34
    DOI: 10.17016/FEDS.2020.034
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    More about this item

    Keywords

    Bank competition; Oil shocks; Out-of-market lending; Transmission of shocks; SME lending;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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