NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Going the Extra Mile: Distant Lending and Credit Cycles

João Granja, Christian Leuz, Raghuram Rajan

NBER Working Paper No. 25196
Issued in October 2018, Revised in September 2019
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Monetary Economics

We examine how competition amongst lenders exacerbates risk taking during a boom using a simple proxy for the risk of a bank’s loan portfolio—the average physical distance of borrowers from banks’ branches. The evolution of lending distances is cyclical, lengthening considerably during an economic upturn and shortening again during the ensuing downturn. More distant small business loans are indeed riskier for the bank, and greater lending distance is reflective of more generalized bank risk taking. As competition in banks’ local lending markets increases, their local lending becomes riskier, and their propensity to make (risky) loans at greater distance increases.

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Document Object Identifier (DOI): 10.3386/w25196

 
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