Propagation of the Opioid Epidemic in the Banking Sector

Abstract

We examine how public health crises undermine bank deposit funding and constrain lending activities. Using the opioid epidemic as our empirical setting, we first document a negative link between local opioid supply and deposit growth at both the county and bank levels. Facing deposit drains, banks systematically reduce lending activities, including mortgage origination and approval, even in distant regions connected to the epidemic areas through banking networks. These reductions are more pronounced for retained loans and concentrate in smaller banks facing greater financial frictions and lacking geographic diversifications. Our results suggest that the negative effects of the opioid crisis extend beyond the geographic boundaries to faraway areas and that prior estimates, focusing on the local effects, underestimate the real economic consequences of the opioid epidemic. Our findings also highlight the challenges to bank operations arising from population health conditions.

Keywords: Opioid epidemic, Banking Network, Deposit, Mortgage Loan

JEL Classification: G20, G21, I15, I18