Going the Extra Mile: Distant Lending and Credit Cycles
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Banks adjust geographic lending distances in response to credit conditions, expanding during expansions & contracting during downturns, according to @JoaoGranja @nberpubss research.
new intuitive finding from Rajan finds that geographic lending distances expand and contract with credit conditions, ie banks stay close to home during contractions and expand their reach during expansion. holds true across bank sizes
"....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..... We find that the long-run trend toward greater average distances between banks and their borrowers, initially documented by Petersen and Rajan (2002), persists in the past 20 years. Importantly, we also find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and also shorten considerably when credit conditions become tighter. Between 2004 and 2007, banks increased their average distances from 175 miles to 350 miles. These distances, however, quickly slipped back to approximately 200 miles following the 2008 financial crisis.This cyclical pattern in lending distances is robust to the inclusion of county-year fixed effects and bank fixed effects suggesting that the results cannot be explained by differences in growth across counties or by changes in the composition of lenders in the economy. This cyclicality also holds when we examine other points of the distribution of distances, such as the median, and lower and upper deciles. We also confirm that it is not driven by a few large banks but can be seen in different size classes of banks...... 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..... We find that the higher the average non-performing loan ratio of the bank, the more cyclical is its pattern in lending distance, suggesting that it was risky to go the extra mile during the boom...."
João Granja, Christian Leuz, Raghuram Rajan, "Going the Extra Mile: Distant Lending and Credit Cycles," National Bureau of Economic Research, October 2018, https://www.nber.org/papers/w25196