“Sorry, We're Closed” Bank Branch Closures, Loan Pricing, and Information Asymmetries

Abstract

We study local loan conditions when banks close branches. In places where branch closures do not take place, firms that purposely switch banks receive a 63 basis points discount. However, after the closure of nearby branches of their credit granting banks, firms that locally and hurriedly transfer to other banks receive no such discount. Yet, the loan default rate for the latter (more expensive) transfer loans is on average a full percentage point lower than that for the former (cheaper) switching loans. This suggests that transfer firms are “better” quality than switching firms. In sum, even if local markets remain competitive, when banks close branches, firms lose.

Bank switching of US small businesses: new methods and evidence

“…To date, there have been only a handful of studies maintaining an explicit or incidental focus on bank switching (Ongena and Smith 2001;Farinha and Santos 2002;Berger et al 2005;Ioannidou and Ongena 2010;Degryse et al 2011;Gopalan et al 2011;Barone et al 2011;Ogane 2019;Bonfim et al 2021). Table 1 summarizes the key differences between these studies and the present paper.…”

“…Grounded in the relationship lending and banking market structure theories of Rajan (1994 and, this paper falls into the broader area of bank switching. Notable exceptions to the scant empirical evidence include the studies of Ongena and Smith (2001), Farinha and Santos (2002), Berger et al (2005), Ioannidou and Ongena (2010), Degryse et al (2011), Barone, G. et al (2011), Gopalan et al (2011) and Bonfim et al (2021). Our contribution is incremental to these studies in the following ways.…”

“…Third, we maintain an exclusive focus on small businesses, i.e., the type of firms for which bank credit matters the most. This approach stands in contrast to the samples used in Ongena and Smith (2001), Farinha and Santos (2002), Ioannidou and Ongena (2010), Barone et al (2011), Gopalan (2011) and Bonfim et al (2021), which include larger firms that have a menu of financing options inaccessible to their smaller counterparts. Fourth, the choice of the US for our empirical setting enables us to investigate and control for the effect of local banking market concentration, a catalyst for the appropriation of credit in small business finance (Petersen and Rajan 1995;Han et al 2017).…”

“…Fourth, the choice of the US for our empirical setting enables us to investigate and control for the effect of local banking market concentration, a catalyst for the appropriation of credit in small business finance (Petersen and Rajan 1995;Han et al 2017). Fifth, in contrast to prior studies that find a negative relationship between borrowing cost and switching (e.g., Ioannidou and Ongena, 2010;Barone et al 2011;Bonfim et al 2021), we document a higher borrowing cost associated with the bank switching for small businesses in the US and we conduct further analysis to propose an alternative mechanism to explain the phenomenon. On the methodological front, we are also the first in the research of small business to address potential endogeneity through the use of inverse-probability treatment weighting (IPTW) and entropy balancing.…”

Inference for ROC Curves Based on Estimated Predictive Indices

“…Though its origins are in the signal detection and medical diagnostics literature, in recent years ROC analysis has become increasingly common in financial and economic applications as well (e.g., Anjali and Bossaerts 2014;Bazzi et al 2021;Bonfim et al 2021;Berge and Jorda 2011;Kleinberg et al 2018;Lahiri and Wang 2013;Lahiri and Yang 2018;McCracken et al 2021;Schularik and Taylor 2012 and many others).…”