COVID-19 and bank branch lending: The moderating effect of digitalization

Abstract

We examine how COVID-19 and digitalization have changed bank lending behavior. Using microdata from Brazil, we investigate the determinants of these changes at the bank branch level and by credit type. Branches in areas more affected by COVID-19 reduced loan issuances and experienced lower credit revenues. These branches could not adjust their costs in the short term due to this decline in lending, resulting in increased marginal costs. We also find that branches of more digitalized banks were less sensitive to local borrowers’ conditions and could expand their clientele. These branches extended credit to borrowers in remote localities less affected by COVID-19, positioning themselves better than branches of less digitalized banks. Our research highlights the critical role of digitalization in distressed periods, as it enables banks to respond more swiftly and effectively, favoring financial stability.