Bank Local Mortgage Exposure and Corporate Lending Decision

Abstract

Credit supply significantly affects firms' operations and employment decisions, shaping local economies. We show that, holding credit supply and demand-side characteristics constant, banks with higher mortgage exposure in a county are more likely to lend to local firms and provide larger loan shares. Our result strengthens in areas experiencing recent unemployment increases, for borrowers critical to local economy and employment, for loans addressing liquidity needs, and for borrowers face lower firing costs. The effect weakens when banks are better insulated from mortgage defaults, suggesting it stems from banks' concerns over mortgage exposure. Additionally, loans from banks with high local mortgage exposure feature lower spreads and fewer performance-based covenants. Our findings suggest that banks internalize cross-asset externalities when making lending decisions.

Keywords: Bank lending, syndicated loans, mortgage exposure, externalities

JEL Classification: D72, G21, G28