Innovating Banks and Local Lending
55 Pages Posted: 17 Jul 2019 Last revised: 25 Jul 2019
Date Written: July 16, 2019
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: Suggested Citation