The importance of brick-and-mortar bank offices: evidence from small business and home mortgage lending, 1998-2016

Abstract

This paper studies the effect of bank branch closures on lending in the Digital Age. Previous studies found that bank branch closings have either no effect or small negative impact on small business lending especially in the low-to-moderate income (LMI) communities. However, decisions to close bank branches are not random and are likely related to local business conditions. As a solution to this endogeneity, and building on work by Nguyen (2018), I use mergers between two large banks with no less than $10B in pre-merger assets with overlapping branching networks as a source of exogenous variation. Using instrumental variable methods, I find that branch closures significantly reduce small business lending (22% reduction in total volume) even in areas with alternative local branches. The total volume of mortgage lending is unaffected. These findings contribute to the debate about the importance of relationship lending, suggesting that physical branches will continue to play an important role mitigating informational asymmetries inherently present in small business lending.