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Going the Extra Mile: Distant Lending and Credit Cycles

Author

Listed:
  • João Granja
  • Christian Leuz
  • Raghuram Rajan
Abstract
The average distance of U.S. banks from their small corporate borrowers increased before the global financial crisis, especially for banks in competitive counties. Small distant loans are harder to make, so loan quality deteriorated. Surprisingly, such lending intensified as the Fed raised interest rates from 2004. Why? We show banks’ responses to higher rates led to bank deposits shifting into competitive counties. Short-horizon bank management recycled these inflows into risky loans to distant uncompetitive counties. Thus, rate hikes, competition, and managerial short-termism explain why inflows ‘burned a hole’ in banks’ pockets and, more generally, increased risky lending.

Suggested Citation

  • João Granja & Christian Leuz & Raghuram Rajan, 2018. "Going the Extra Mile: Distant Lending and Credit Cycles," NBER Working Papers 25196, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25196
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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