Innovating Banks and Local Lending

Abstract

We study the effects of bank innovations on local deposit inflows and credit supply. To identify the causal effect of bank innovations on deposits and lending, we employ two distinct instrumental variables to explain banks’ patent approvals--the geographic heterogeneity of the human capital available at bank headquarters and the leniency of patent examiners. Banks that innovate experience deposit inflows, increase their local market power, and expand aggregate local lending, without impairing the quality of their loan portfolio. Finally, we show that innovation-induced credit supply shocks spur local economic growth and employment.