Innovating Banks and Local Lending

55 Pages Posted: 17 Jul 2019 Last revised: 25 Jul 2019

See all articles by Denefa Bostandzic

Denefa Bostandzic

Heinrich Heine University Dusseldorf

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Date Written: July 16, 2019

Abstract

We study the effects of financial and technological innovation by banks on local competition for deposits and credit supply. Banks that innovate increase their local market power by gaining deposits in a zero sum game at the expense of local non-innovating competitors. Innovative banks make use of both the additional liquidity as well as process innovations itselves and expand aggregate local mortgage lending. Banks allocate their additional funding efficiently with loan performance improving for banks that innovate. We employ two instrumental variable approaches that relate the number of patents awarded to a bank holding company to the human capital available to the bank as well as to the leniency of patent examiners to identify the causal effect of bank innovation on deposits and lending.

Keywords: Innovation, Financial Technology, Competition, Branch Banking, Credit Supply

JEL Classification: G20, G21

Suggested Citation

Bostandzic, Denefa and Weiss, Gregor N. F., Innovating Banks and Local Lending (July 16, 2019). Available at SSRN: https://ssrn.com/abstract=3421123 or http://dx.doi.org/10.2139/ssrn.3421123

Denefa Bostandzic

Heinrich Heine University Dusseldorf ( email )

Universitätsstrasse 1
Duesseldorf, DE NRW 40225
Germany

Gregor N. F. Weiss (Contact Author)

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

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