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Marriott Marquis, Torrey Pines 3
American Economic Association
Bank Lending and Real Outcomes
Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Dalida Kadyrzhanova, Georgia State University
Banking on the Firm Objective
AbstractIn the U.S., credit unions lent as much as 10-20 percentage points more relative to commercial banks during the Great Recession. Comparing institutions that faced similar borrowers within narrowly-defined local credit markets and similar crisis exposures shows the effect is supply-driven. Balance sheet mechanisms, loan pricing, informational advantages, tax benefits, and regulation do not explain results. Rather, higher lending was sustained by lower profit margins, suggesting that cooperative and member-oriented firm objectives led the $1.4 trillion dollar credit union industry to lend more relative to profit-maximizing banks.
How Important Are Local Community Banks to Small Business Lending? Evidence from Mergers and Acquisitions
AbstractWe investigate the shrinking community banking sector and the impact on local small business lending (SBL) in the context of mergers and acquisitions. From all mergers that involved community banks, we examine the varying impact on SBL depending on local presence of the acquirers’ and the targets’ operations prior to acquisitions. Our results indicate that, relative to counties where the acquirer had operations in before the merger, local SBL declined significantly more in counties where only the target had operations in before the merger. This result holds even after controlling for the general local SBL market or local economic trends. These findings are consistent with an argument that SBL funding has been directed (after the mergers) toward the acquirers’ counties. We find even stronger evidence during and after the financial crisis. Overall, we find evidence that local community banks have continued to play an important role in providing funding to local small businesses. The absence of local community banks that became a target of a merger or acquisition by non-local acquirers has, on average, led to local SBL credit gaps that were not filled by the rest of the banking sector.
Does Audit Market Competition Matter to Investors? Evidence from Cost of Bank Financing
AbstractThis paper studies the effect of audit market competition on the clients' cost of bank loans. Exploiting the demise of Arthur Andersen, which differently reduced the local audit market competition of metropolitan statistical areas (MSAs), we find that auditor competition increases the cost of bank loans of auditors' client firms. Further analysis indicates that this effect is more pronounced when external monitoring with respect to financial reporting is weaker and when a client is more economically important to its auditor. The findings are consistent with the auditor-client conflict of interest hypothesis.
Consumer Lending Efficiency:Traditional Bank Lenders Versus Lending Club
AbstractUsing 2013 and 2016 data, we compare the performance of unsecured personal installment loans made by traditional bank lenders to that of LendingClub. We apply a widely used stochastic frontier estimation technique to decompose the observed rate of nonperforming loans into three components: first, the best-practice minimum ratio that, given the ratio of nonperforming consumer loans to total consumer lending, a lender could achieve if it were fully efficient at credit-risk evaluation and loan management; second, a ratio that is the difference between the observed ratio adjusted for statistical noise and the minimum ratio that gauges the lender’s relative proficiency at credit analysis and loan monitoring; and, third, statistical noise. In 2013 and 2016, the largest bank lenders experience the highest ratio of nonperforming loans, the highest inherent credit risk, and the highest lending efficiency – indicating that their high ratio of nonperformance is driven by inherent credit risk rather than by lending inefficiency. LendingClub’s performance was similar to small bank lenders as of 2013. Interestingly, as of 2016, LendingClub’s performance resembled the largest bank lenders -- highest ratio of nonperforming loans, highest inherent credit risk, and highest lending efficiency -- although its loan volume was smaller. Our findings are consistent with previous study, suggesting that nontraditional data and advanced algorithms allowed LendingClub to become more effective in risk identification and pricing starting in the 2015 origination year. Caveat: this conclusion may not be applicable to fintech lenders in general and the results may not hold under different economic conditions such as a downturn.
- G2 - Financial Institutions and Services