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Manchester Grand Hyatt, Seaport C
Hosted By:
American Finance Association
have substantial market power. What are the efficiency implications and policy remedies to
bank concentration? We build a model of bank competition with endogenous interest rates,
loan size, and take-up. We estimate the model using the universe of loans made through the
Small Business Administration (SBA). Our novel identification strategy builds on and extends
the “bunching” literature that uses kinks and notches to identify key elasticities, utilizing a
discontinuity in SBA’s interest rate cap. We find banks capture at least 30% of the surplus
in a majority of lending markets. Imposing a uniform interest rate cap of 5% would increase
borrower welfare by 9%, but also cause substantial rationing. While the guarantee subsidy
program used by the SBA raises borrower surplus by 17%, we find that banks capture the
majority of increase in surplus.
Bank and SBA Lending Behavior
Paper Session
Saturday, Jan. 4, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Manju Puri, Duke University and NBER
Going the Extra Mile: Distant Lending and Credit Cycles
Abstract
We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks’ branches. We propose that this novel measure captures the extent to which lenders are willing to stretch their lending portfolio. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. Next, we show that a sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. Finally, we provide evidence that as competition in banks’ local markets increases, their willingness to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors.Market Power in Small Business Lending
Abstract
While bank lending is an important financing channel for small firms, banks in the U.S.have substantial market power. What are the efficiency implications and policy remedies to
bank concentration? We build a model of bank competition with endogenous interest rates,
loan size, and take-up. We estimate the model using the universe of loans made through the
Small Business Administration (SBA). Our novel identification strategy builds on and extends
the “bunching” literature that uses kinks and notches to identify key elasticities, utilizing a
discontinuity in SBA’s interest rate cap. We find banks capture at least 30% of the surplus
in a majority of lending markets. Imposing a uniform interest rate cap of 5% would increase
borrower welfare by 9%, but also cause substantial rationing. While the guarantee subsidy
program used by the SBA raises borrower surplus by 17%, we find that banks capture the
majority of increase in surplus.
Discussant(s)
Sasha Indarte
,
Northwestern University
Steven Ongena
,
University of Zurich
Mark Egan
,
Harvard University
JEL Classifications
- G2 - Financial Institutions and Services