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Local banks and the effects of oil price shocks

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  • Wang, Teng

Abstract

This paper studies the effects of the oil price shocks on local banks, and the propagation of the shocks through banks’ branching networks. Exposed banks with significant operations in oil-concentrated counties experienced a decline in demand deposit, a surge in credit line drawdowns, and a jump in troubled loans. Facing liquidity pressure, banks were forced to sell liquid assets, offer higher deposit rates, and reduce lending to small businesses and mortgage borrowers in unaffected markets. The effect is magnified when banks do not have strong community ties, while it is mitigated if banks have higher liquidity buffers, or sufficiently dispersed branching networks. I further document that healthy unexposed banks’ capacity to substitute credit supply is quite limited, providing fresh evidence from the perspective of bank competition.

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  • Wang, Teng, 2021. "Local banks and the effects of oil price shocks," Journal of Banking & Finance, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:jbfina:v:125:y:2021:i:c:s0378426621000273
    DOI: 10.1016/j.jbankfin.2021.106069
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    2. Mollick, André V. & Killins, Robert N. & Egly, Peter V. & Johnk, David W., 2024. "Bank equity returns and oil prices: The story from U.S. regional banks during the “shale oil” revolution," Research in International Business and Finance, Elsevier, vol. 70(PA).
    3. Barth, James R. & Hu, Qinyou & Sickles, Robin & Sun, Yanfei & Yu, Xiaoyu, 2024. "Direct and indirect impacts of natural disasters on banks: A spatial framework," Journal of Financial Stability, Elsevier, vol. 70(C).
    4. Zhang, Yunhan & Gabauer, David & Gupta, Rangan & Ji, Qiang, 2024. "How connected is the oil-bank network? Firm-level and high-frequency evidence," Energy Economics, Elsevier, vol. 136(C).
    5. Eduardo Minuci & Scott Schuh, 2022. "Are West Virginia Banks Unique?," Working Papers 22-03, Department of Economics, West Virginia University.
    6. Kyriazis, Nikolaos & Corbet, Shaen, 2024. "Evaluating the dynamic connectedness of financial assets and bank indices during black-swan events: A Quantile-VAR approach," Energy Economics, Elsevier, vol. 131(C).
    7. Davide Castellani & Elisa Giaretta, 2024. "Multimarket Banks, Local Economic Shocks, and Lending Behavior: When the Effect is on Cost but not on the Amount of Deposit Fundings," Journal of Financial Services Research, Springer;Western Finance Association, vol. 66(2), pages 193-225, October.
    8. Fernandez-Perez, Adrian & Indriawan, Ivan & Tse, Yiuman & Xu, Yahua, 2023. "Cross-asset time-series momentum: Crude oil volatility and global stock markets," Journal of Banking & Finance, Elsevier, vol. 154(C).
    9. Bruna, Karel & Van Tran, Quang, 2023. "Asymmetric effects of oil price shocks on EUR/USD exchange rate and structural shock decomposition in a BVAR model with sign restriction," Energy Economics, Elsevier, vol. 128(C).

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