Distance Still Matters: Local Bank Closures and Credit Availability

Abstract

In recent years, commercial banks have substantially reduced the number of their
branch offices. We address the question of whether or not the increased distance to
lenders caused by branch office closures translates into a lower credit supply for small
and medium sized enterprises (SMEs). We use a unique dataset based on 33,000 loan
contracts from a state-owned Swedish bank designed to support credit-constrained
SMEs, and relate loan size and the interest rate to the number of nearby commercial
bank offices. We use an IV strategy to account for potential endogeneity of the number
of banks in a region. In line with previous studies, we find that interest rates increase
with distance, while loan size decreases with distance. Thus, a larger number of local
bank offices increases the local credit supply, and thereby reduces credit constraints of
nearby SMEs.

Keywords: Credit Constraints, Relationship Banking, State Owned Bank, Small Business

JEL Classification: L52, O38, H81, L26, G28