Does greater bank competition increase third-party guarantee loan default rates? evidence from U.S. interstate branching deregulation

Pankaj C. Patel

Applied Economics, 2021, vol. 53, issue 20, 2360-2383

Abstract: Exploiting the interstate branching restrictiveness law that allowed states to erect barriers to branch expansion, we test whether increased interbank competition increases risk-bearing, proxied by higher loan default, for third-party loan guarantors. We find that Small Business Administration (SBA) loans from states with higher restrictiveness (lower competition) are less likely to default, by at least four percent. The findings are robust to a variety of falsification tests. Confirming increased risk transfer to SBA, banks in less restrictive states facing increased competition: increased both SBA loan amount and duration of the loan and the learning-by-loaning (cumulative loan volume before the current loan) did not affect the likelihood of default of the current loan. Counterfactually, loans of higher approval amount and longer duration were less likely to default in more restrictive states.

Date: 2021
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DOI: 10.1080/00036846.2020.1859454

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