Geographic Diffusion of COVID-19 Economic Shocks: An Examination of Bank Transmission Effects

Abstract

We present evidence that multi-market banks transmitted economic shocks relating to the COVID-19 crisis among the geographic areas where the banks operate. We find that banks transmission effects were about half as economically significant as the direct effect of the shocks. We also find that the presence of community banks in a geographic area mitigates multi-market bank transmission effects. Our results illustrate the importance of banks for local economic outcomes, and the role of community banks in mitigating the transmission of economic shocks. Our results also suggest that policy responses to economic shocks should be informed by the structure of the geographic network of the local banks.

Keywords: COVID-19, contagion, transmission of shocks, credit supply, multimarket banks, bank stability

JEL Classification: G21, G32