A Geographical Analysis of Commercial Lending by US Banks: A Study of Knowledge-Intensive Business Services
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According to the concept of “home bias”, investors prefer proximate investments to distant investments because they enjoy a better flow of potentially-valuable information about them. US retail banks have traditionally relied on a model of commercial loan origination with a strong home bias: both bank branches and headquarters are located near borrowers. Such proximity allows lenders to more easily absorb tacit information about a borrower’s creditworthiness and communicate this information to all parts of the bank’s hierarchy. But major shocks to the retail bank industry beginning around 1994 allowed (primarily large) US banks to acquire branches beyond the state in which they were headquartered (“out of state branches”). Large, geographically-expanding banks found an increasing number of their branches located at a distance and adopted a strategy of commercial loan origination based on codified information. Codified information is easier to understand through layers of hierarchy and distance than tacit information cannot capture as many dimensions of borrower creditworthiness. As a result, transaction-based loans are more prone to default. There are research questions to be answered regarding the pace and scale of this geographic expansion and the new ways that distance affects commercial loan capital. This dissertation examines the changing distance between bank headquarters and branches and finds that the rate of growth in this distance rose after 1994 but fell after the 2008 financial crisis. It also examines the changing distance between bank headquarters and commercial loan borrowers and finds that the rate of growth in this distance rose after 1997 but fell after the 2008 financial crisis. Additionally, it finds that growth in out of state bank branches in a county is associated with increased commercial loan supply. This dissertation has implications for federal regulators in the criteria they consider for geographic antitrust analysis.