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The Geographic Flow Of Bank Funding And Access To Credit: Branch Networks And Local-market Competition

Author

Listed:
  • Robert Clark

    () (Queen's University)

  • Hui Wang

    (Peking University)

  • Victor Aguirregabiria

    (University of Toronto and CEPR)

Abstract

This paper studies the integration of deposit and loan markets, which may be constrained by the geographic dispersion of depositors, borrowers, and banks. This dispersion results in problems of asymmetric information, monitoring and transaction costs, which in turn may prevent deposits from flowing from areas of low demand for loans to areas of high demand. We provide systematic evidence on the extent to which deposits and loans are geographically imbalanced, and develop a methodology for investigating the contribution of (i) branch networks, (ii) local market power, and (iii) economies of scope to this imbalance using data at the bank-county-year level from the US banking industry for 1998-2010. Our results are based on the construction of an index which measures the geographic imbalance of deposits and loans, and the estimation of a structural model of bank oligopoly competition for deposits and loans in multiple geographic markets. The estimated model shows that a bank's total deposits have a significant effect on the bank's market shares in loan markets. We also find evidence of significant economies of scope between deposits and loans at the local level. Counterfactual experiments show that multi-state branch networks contribute significantly to the geographic flow of credit but benefit especially larger/richer counties. Local market power has a very substantial negative effect on the flow of credit to smaller/poorer counties.

Suggested Citation

  • Robert Clark & Hui Wang & Victor Aguirregabiria, 2017. "The Geographic Flow Of Bank Funding And Access To Credit: Branch Networks And Local-market Competition," Working Paper 1402, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1402
    as

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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1402.pdf
    File Function: First version 2017
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    References listed on IDEAS

    as
    1. Degryse, Hans, 1996. "On the Interaction between Vertical and Horizontal Product Differentiation: An Application to Banking," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 169-186, June.
    2. Adam Ashcraft & James Mcandrews & David Skeie, 2011. "Precautionary Reserves and the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 311-348, October.
    3. Luca Papi & Emma Sarno & Alberto Zazzaro, 2017. "The geographical network of bank organizations: issues and evidence for Italy," Chapters, in: Ron Martin & Jane Pollard (ed.), Handbook on the Geographies of Money and Finance, chapter 8, pages 156-196, Edward Elgar Publishing.
    4. repec:ucp:jpolec:doi:10.1086/701684 is not listed on IDEAS
    5. Victor Aguirregabiria & Robert Clark & Hui Wang, 2016. "Diversification of geographic risk in retail bank networks: evidence from bank expansion after the Riegle-Neal Act," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 529-572, August.
    6. Jason Allen & Robert Clark & Jean-François Houde, 2019. "Search Frictions and Market Power in Negotiated-Price Markets," Journal of Political Economy, University of Chicago Press, vol. 127(4), pages 1550-1598.
    7. Petkov, Ivan, 2015. "Small Business Lending and the Bank-Branch Network," MPRA Paper 85762, University Library of Munich, Germany, revised 13 Oct 2017.
    8. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    9. Mankart, Jochen & Michaelides, Alexander & Pagratis, Spyros, 2018. "Bank capital buffers in a dynamic model," Discussion Papers 51/2018, Deutsche Bundesbank.
    10. Alexander Bogin & William Doerner & William Larson, 2019. "Local House Price Dynamics: New Indices and Stylized Facts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 47(2), pages 365-398, June.
    11. Neven, Damien & Roller, Lars-Hendrik, 1999. "An aggregate structural model of competition in the European banking industry," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 1059-1074, October.
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    Cited by:

    1. Nuno Paixao, 2018. "Housing Prices and Consumer Spending: The Bank Balance Sheet Channel," 2018 Meeting Papers 1017, Society for Economic Dynamics.

    More about this item

    Keywords

    Economies of scope between deposits and loans; Geographic flow of bank funds; Access to credit; Bank oligopoly competition; Branch networks;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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