Essays on Banking and Local Credit Markets

Essays on Banking and Local Credit Markets by Hoai-Luu Q. Nguyen Submitted to the Department of Economics on May 15, 2015, in partial fulfillment of the requirements for the degree of Doctor of Philosophy This thesis consists of three chapters on banking and local credit markets. The first chapter studies the relationship between bank-specific capital and credit access in a new setting: bank branch closings in markets where the branch network is dense. Existing regulation in the U.S. is targeted toward areas with few branches where closings inhibit physical access to the branch network. I show that, even in crowded markets, closings can have large effects on local credit supply. To generate plausibly exogenous variation in the incidence of closings, I use Census tract level data paired with a novel identification strategy that exploits within-county variation in exposure to post-merger consolidation. This instrument identifies the effect of closings that occur in close proximity to other branches. I find that closings have a prolonged negative impact on credit supply to local small businesses, but only a temporary effect on local mortgage lending. The number of new small business loans is 13% lower for several years, and this decline persists even after the entry of new banks. The decline in lending is highly localized, dissipating 8 miles out, and is concentrated in low-income and high-minority neighborhoods. These results show closings have large effects on local credit supply when lending is information-intensive and lender-specific relationships are difficult to replace. The second chapter (co-authored with Michael Greenstone and Alexandre Mas) estimates the effect of the reduction in credit supply that followed the 2008 financial crisis on the real economy. We predict county lending shocks using variation in pre-crisis bank market shares and estimated bank supply-shifts. Counties with negative predicted shocks experienced declines in small business loan originations, indicating that it is costly for these businesses to find new lenders. Using confidential microdata from the Longitudinal Business Database, we find that the 2007-2009 lending shocks accounted for statistically significant, but economically small, declines in both small firm and overall employment. Predicted lending shocks affected lending but not employment from 1997-2007. The third chapter uses a cash demand framework to model household credit decisions when there are both fixed and marginal costs associated with borrowing. In standard models of credit demand, the price associated with a loan is simply the interest rate. In reality, however, loan contracts encompass many dimensions that contribute to the effective price a household pays to borrow. Understanding how these other factors influence households' credit decisions is important for evaluating the impact of policy on household credit demand. I show, using data from Thailand, that the cash demand model matches many observed patterns of household behavior while providing a framework for understanding how tradeoffs between different costs drive borrowing decisions. Thesis Supervisor: Michael Greenstone Title: Milton Friedman Professor of Economics, University of Chicago Thesis Supervisor: Robert M. Townsend Title: Elizabeth & James Killian Professor of Economics