Going the Extra Mile: Distant Lending and Credit Cycles

64 Pages Posted: 13 Nov 2018

See all articles by Joao Granja

Joao Granja

University of Chicago - Booth School of Business

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 22, 2018

Abstract

We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks’ branches. We propose that this novel measure captures the extent to which lenders are willing to stretch their lending portfolio. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. Next, we show that a sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. Finally, we provide evidence that as competition in banks’ local markets increases, their willingness to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors.

Keywords: Lending Distance; Credit Cycles; Bank Competition; Bank Risk-Taking; Soft Information

JEL Classification: G20. G21, G28, G32, G34, M48

Suggested Citation

Granja, Joao and Leuz, Christian and Rajan, Raghuram G., Going the Extra Mile: Distant Lending and Credit Cycles (October 22, 2018). Available at SSRN: https://ssrn.com/abstract=3271079 or http://dx.doi.org/10.2139/ssrn.3271079

Joao Granja (Contact Author)

University of Chicago - Booth School of Business ( email )

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Christian Leuz

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

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Raghuram G. Rajan

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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