Abstract
This paper uses branching and interstate banking deregulation as a natural experiment to explore the effect of agency cost on the use of bank loan commitments. A simple inventory-based model shows that lower agency cost facilitates more issuance of loan commitments because lower agency cost alleviates the difficulty of liquidity management associated with loan commitments. Our empirical analysis confirms the model’s testable implication: Commercial banks issue more loan commitments after interstate banking deregulation, which expanded internal capital markets across states. However, the effect of branching deregulation is weak or non-existent. Considering the role of bank loan commitments, these results provide one route though which regulatory changes have real effects to macroeconomy.
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