Going the Extra Mile: Distant Lending and Credit Cycles

91 Pages Posted: 29 Oct 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)

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Date Written: October 2018

Abstract

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.

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Suggested Citation

Granja, Joao and Leuz, Christian and Rajan, Raghuram G., Going the Extra Mile: Distant Lending and Credit Cycles (October 2018). NBER Working Paper No. w25196. Available at SSRN: https://ssrn.com/abstract=3274422

Joao Granja (Contact Author)

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Christian Leuz

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Raghuram G. Rajan

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