Banking Market Structure and Trade Shocks

Abstract

The structure of the local banking market, characterized by bank specialization and bank concentration, can affect credit and labor market responses to an import shock to the local economy. During the surge in U.S. imports from China from 1998 to 2006, small business loans (SBL) decline in counties that face a larger import shock. Bank geographical specialization positively affects banks’ SBL origination in response to the import shock. Consistent with these results, average employment declines in counties hit by the import shock, while higher bank specialization attenuates this negative labor outcome. Furthermore, in the face of import competition, credit support by specialized banks helps small businesses to respond to the heightened competition through firm innovation. We find little evidence for such stabilizing effects for bank concentration.