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

Abstract

We study local loan conditions when, under external pressure, banks close branches. After the closure of nearby branches of their credit granting banks, firms that locally and hurriedly transfer to other banks receive an equivalent interest rate. However, and in stark contrast, where branch closures do not take place firms that purposely switch banks receive a 63 basis points discount. At the same time, the loan default rate for the (more expensive) transfer loans is on average a full percentage point lower than that for the (cheaper) switching loans. This suggests that firms that establish new relationships after their bank branch closes are “better” than regular switchers in terms of unobservable characteristics. Taken together, these findings provide evidence of losses for firms when banks close branches, even if local markets remain competitive.

Keywords: competition, banking sector, market structure

JEL Classification: G21, L11, L14