Branching Networks and Geographic Contagion of Commodity Price Shocks

43 Pages Posted: 18 May 2020

See all articles by Teng Wang

Teng Wang

Board of Governors of the Federal Reserve System

Date Written: May 1, 2020

Abstract

This paper studies the role of banks' branching networks in propagating the oil shocks. Banks that were exposed to the oil shocks through their operations in oil-concentrated counties experienced a liquidity drainage in the form of a declining amount of demand deposit inflow as well as an increasing percentage of troubled loans. Banks were forced to sell liquid assets, and contracted lending to small businesses and mortgage borrowers in counties that were not directly affected by the oil shocks. The effect is magnified when banks do not have strong community ties, but is mitigated if banks' branching network is sufficiently dispersed. I also find the decline in local credit supply cannot be completely offset by healthy competing banks' increased lending, providing fresh evidence from the perspective of bank competition.

Keywords: Bank competition; Oil shocks; Out-of-market lending; Transmission of shocks; SME lending

JEL Classification: G20; G21; G30

Suggested Citation

Wang, Teng, Branching Networks and Geographic Contagion of Commodity Price Shocks (May 1, 2020). FEDS Working Paper No. 2020-034 https://doi.org/10.17016/FEDS.2020.034 , Available at SSRN: https://ssrn.com/abstract=3601307

Teng Wang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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