Going the Extra Mile: Distant Lending and Credit Cycles

João Granja, Christian Leuz and Raghuram Rajan

No 25196, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E32 E44 G01 G18 G21 G32 L14 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-ban, nep-mac and nep-ure
Note: CF EFG ME
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Citations: View citations in EconPapers (25)

Published as JOÃO GRANJA & CHRISTIAN LEUZ & RAGHURAM G. RAJAN, 2022. "Going the Extra Mile: Distant Lending and Credit Cycles," The Journal of Finance, vol 77(2), pages 1259-1324.

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