Going the Extra Mile: Distant Lending and Credit Cycles
64 Pages Posted: 13 Nov 2018
Date Written: October 22, 2018
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: Suggested Citation