“Going the Extra Mile: Distant Lending and Credit Cycles” – by Dr. Joao Granja
Dr. Joao Granja
Assistant Professor of Accounting
Booth School of Business
University of Chicago
We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks’ branches. We conjecture that this novel measure captures the extent to which lenders are willing to relax their credit standards. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably during an economic upturn and shorten again during the ensuing downturn. Next, we show that a sharp departure from the trend in distance between banks and borrowers indicates increased risk taking. Finally, we provide evidence that as competition in banks’ local markets increases, their propensity to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors.