The Causal Impact of Distance on Bank Lending

Abstract

We exploit exogenous shocks to the distance between corporate borrowers and both relationship- and competing banks from infrastructure improvements to analyze the causal impact of distance on lending. Reductions in travel time impact both new and existing borrowing relationships. Lower distance increases the likelihood of initiating a new banking relationship, consistent with an economic surplus from lower transaction costs. In existing lending relationships banks capture part of this surplus by increasing interest rates, in particular if banks have higher market power. Reductions in travel time to competing banks have the opposite effects for both relationship initiation and interest rates.

Keywords: bank credit, lending relationship, spatial price discrimination

JEL Classification: G21, L11, L14