Banking Market Structure and Trade Shocks

Abstract

The structure of the local banking market, characterized by bank specialization and bank concentration, affects credit and labor market responses to an import shock to the local economy. During the surge in U.S. imports from China from 1998 to 2006, small business loans (SBL) decline in counties that face a larger import shock. Bank geographical specialization positively affects banks' SBL origination in response to the import shock, while there is little evidence for a significant effect with respect to bank concentration. Consistent with these results, average employment and wage growth decline in counties hit by the import shock, while higher bank specialization attenuates these negative labor outcomes. Bank concentration does not seem to have such attenuation effects. Furthermore, in the face of import competition bank specialization relatively improves firm innovation, which itself seems to help such banks keep their profitability and asset quality intact.

Keywords: Banking market structure, Import competition, Labor market outcomes

JEL Classification: G21, G29, L10, F14, F16, F49