Abstract
AbstractIn recent years, commercial banks have substantially reduced the number of their branch offices. We address the question of whether or not the increased distance to lenders caused by branch office closures translates into a lower credit supply for small and medium sized enterprises (SMEs). We use a unique dataset based on 33,000 loan contracts from a state‐owned Swedish bank designed to support credit‐constrained SMEs, and relate loan size and the interest rate to the number of nearby commercial bank offices. We use an IV strategy to account for potential endogeneity of the number of banks in a region. In line with previous studies, we find that interest rates increase with distance, while loan size decreases with distance. Thus, a larger number of local bank offices increases the local credit supply, and thereby reduces credit constraints of nearby SMEs.
Highlights
The substantial reduction in the number of branch offices maintained by commercial banks observed in many countries has engendered widespread concerns related to financing opportunities faced by small and medium sized enterprises (SMEs) (Saunders and Steffen, 2011)
We investigate the effects of the density of banks in different geographic areas by using a unique firm-level dataset on loans granted by Almi, a state-owned Swedish bank whose institutional role is to reduce the credit constraints faced by SMEs by co-financing projects with commercial banks
We investigate the effects of the increased distance between SMEs and their potential lending bank caused by the reduction of the number of commercial bank branch offices
Summary
The substantial reduction in the number of branch offices maintained by commercial banks observed in many countries has engendered widespread concerns related to financing opportunities faced by SMEs (Saunders and Steffen, 2011) This reduction increases the physical distance between lenders and borrowers, which could hamper the flow of soft and/or unverifiable information that facilitates lending operations (Agarwal and Hauswald, 2010; Inderst and Mueller, 2007). The fact that Sweden plays a leading role in the development and adoption of digital technologies for financial services, provides an interesting context for our study (OECD, 2018) This firm-level dataset allows us to test if the local density of commercial banks in different areas impacts SMEs’ access to credit. If an SME is considering a new location, the managerial team should take into account the benefits of being proximate to a local bank
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