The Importance of Brick-and-Mortar Bank Office for Lending? Evidence from Small Business and Home

This paper studies the effect of bank branch closures on local lending in the Digital Ages. I use the mergers between big banks as an exogenous shock to create a quasi-random experiment. Combining the difference-in-differences and the instrumental variable methods, I find that the closure of each physical branch causes a 20% decrease in the total number and the volume of small business lending, even in the areas with sufficient alternative local branches. It indicates that relationship lending plays an important role in small business loaning due to the informational asymmetries in assessing the creditworthiness of local small firms and the difficulties in translating the soft information into hard information. ∗I am deeply grateful to my advisor, Olga Gorbachev, for her continuous advice, support and guidance throughout the project and my doctoral studies. I would like to thank Adrienne Lucas for her extremely useful suggestions both on the research and on the writing. I have also benefited greatly from the comments of James Butkiewicz and Breck Robinson. I thank Jason Richardson, Bruce Mitchell and the National Community Reinvestment Coalition for the helpful discussions and advice. I also thank Kievina Haynes for her help in writing. All errors are mine. †Department of Economics, University of Delaware. [email protected]