COVID-19 and Credit Reallocation: evidence from bank branch lending in Brazil

This study examines how the COVID-19 pandemic influenced bank branch lending behavior in Brazil. Using the different timing and severity of COVID-19 across Brazilian municipalities and identified bank branch credit operations, we construct a branch-specific measure of COVID-19 exposure. Our findings reveal a notable credit reallocation in Brazil during the first year of the pandemic: inland branches more affected by COVID-19 significantly reduced credit to capital-based borrowers while increasing lending to inland clients, driven by heightened risk perceptions of capital-based borrowers. This shift was particularly evident among less liquid and public banks and in regions with more diversified local credit markets. The reallocation was primarily driven by personal loans, indicating that government stimulus measures effectively sustained credit flow to firms despite higher borrowing costs. Our study provides critical insights into the heterogeneous effects of the pandemic on credit markets, highlighting the importance of bank characteristics and regulatory interventions in ensuring financial stability during crises.