Going the Extra Mile: Distant Lending and Credit Cycles
90 Pages Posted: 13 Nov 2018 Last revised: 4 Sep 2019
Date Written: July 19, 2019
We examine how competition amongst lenders exacerbates risk taking during a boom using a simple proxy for the risk of a bank’s loan portfolio—the average physical distance of borrowers from banks’ branches. The evolution of lending distances is cyclical, lengthening considerably during an economic upturn and shortening again during the ensuing downturn. More distant small business loans are indeed riskier for the bank, and greater lending distance is reflective of more generalized bank risk taking. As competition in banks’ local lending markets increases, their local lending becomes riskier, and their propensity to make (risky) loans at greater distance increases.
Keywords: Lending Distance; Credit Cycles; Bank Competition; Bank Risk-Taking; Soft Information
JEL Classification: G20; G21; G28; G32; G34; M48
Suggested Citation: Suggested Citation