Exporting Liquidity: Branch Banking and Financial Integration

Abstract

Using exogenous deposit windfalls from oil and natural gas shale discoveries, we demonstrate that bank branch networks help integrate U.S. lending markets. We find that banks exposed to shale booms increase their mortgage lending in non-boom counties by 0.93% per 1% increase in deposits. This effect is present only in markets where banks have branches and is strongest for mortgages that are hard to securitize. Our findings suggest that contracting frictions limit the ability of arm's length finance to integrate credit markets fully. Branch networks continue to play an important role in financial integration, despite the development of securitization markets. *We thank seminar participants at

The Cross‐Market Spillover of Economic Shocks through Multimarket Banks

“…We confine our attention to first-lien, conventional loans for the purchase 7. Cortés and Strahan (2014) suggest their results are consistent with those of Gilje, Loutskina, and Strahan (2014), though branch presence has very different effects in the two cases. They argue that the informational advantages of branches result in new loans being funded with deposits in branch markets but with open-market funds or loan sales in no-branch markets.…”

“…These studies draw on previous work concluding that banks benefit from the ability to collect soft information about home mortgage borrowers through relationships with local borrowers and knowledge of the local economy (Loutskina and Strahan 2011, Cortés 2012, Ergungor and Moulton 2014. Gilje, Loutskina, and Strahan (2014) find that a positive shock to local deposits due to the fracking boom causes multimarket banks to increase mortgage lending in other markets, but only those in which they have branches. Cortés and Strahan (2014) examine positive shocks to loan demand in a market due to the need to rebuild following a natural disaster.…”

“…These results imply that the spillover effect of outside mortgage distress generally dominated the substitution effect, causing multimarket banks to decrease local lending more than other banks with similar characteristics operating in the same market. 25 Furthermore, in contrast to other studies such as Gilje, Loutskina, and Strahan (2014) and Cortés and Strahan (2014), the transmission of shocks is not just to one type of market, such as those with branches or those without branches, but to almost all types of markets.…”

Funding Liquidity without Banks: Evidence from a Shock to the Cost of Very Short‐Term Debt

“…6 In contrast to the extant literature, our shock focuses on the liquidity role of banks. Most existing studies test how shocks that affect banks' cost of funds (e.g., monetary policy), bank solvency (e.g., bank failures, as in Peek and Rosengren (2000)), or the supply of local bank deposits (e.g., Becker (2007), Gilje, Loutskina, and Strahan (2016)) propagate to nonfinancial firms. These types of shocks affect both the liquidity/payments role of banks and the creditproduction role, thus making it hard to distinguish which aspect of banking (credit or liquidity) affects which firm outcomes.…”

Selling Failed Banks

“…The literature suggests that relationships add value because banks have information about borrowers (e.g., Diamond (1984), James (1987)); that relationships increase the availability of credit and reduce interest rates on loans, especially for small firms (e.g., Berger and Udell (1995), Petersen and Rajan (2002)); and that, while deregulation and technological change have brought significant changes in the banking system (e.g., Kroszner and Strahan (1999)), small banks may be able to maintain the advantages associated with relationship banking (e.g., Berger et al (1998Berger et al ( , 2005). A related recent strand of literature argues that, despite significant improvements in financial innovations, such as securitization over the past few years, the location of the branch network still matters for a bank's investment decisions (Gilje, Loutskina, and Strahan (2013)). Our paper contributes to this work by arguing that these dimensions play a critical role in the allocation of failed banks.…”