IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2020-34.html
   My bibliography  Save this paper

Branching Networks and Geographic Contagion of Commodity Price Shocks

Author

Abstract

This paper studies the role of banks' branching networks in propagating the oil shocks. Banks that were exposed to the oil shocks through their operations in oil-concentrated counties experienced a liquidity drainage in the form of a declining amount of demand deposit inflow as well as an increasing percentage of troubled loans. Banks were forced to sell liquid assets, and contracted lending to small businesses and mortgage borrowers in counties that were not directly affected by the oil shocks. The effect is magnified when banks do not have strong community ties, but is mitigated if banks' branching network is sufficiently dispersed. I also find the decline in local credit supply cannot be completely offset by healthy competing banks' increased lending, providing fresh evidence from the perspective of bank competition.

Suggested Citation

  • Teng Wang, 2020. "Branching Networks and Geographic Contagion of Commodity Price Shocks," Finance and Economics Discussion Series 2020-034, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2020-34
    DOI: 10.17016/FEDS.2020.034
    as

    Download full text from publisher

    File URL: https://www.federalreserve.gov/econres/feds/files/2020034pap.pdf
    Download Restriction: no

    File URL: https://libkey.io/10.17016/FEDS.2020.034?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Alberto M. Ramos, 1996. "Deposit insurance, bank capital structures and the demand for liquidity," Working Paper Series, Issues in Financial Regulation WP-96-8, Federal Reserve Bank of Chicago.
    2. Zarutskie, Rebecca, 2006. "Evidence on the effects of bank competition on firm borrowing and investment," Journal of Financial Economics, Elsevier, vol. 81(3), pages 503-537, September.
    3. Viral V. Acharya & Philipp Schnabl, 2010. "Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09," NBER Working Papers 16079, National Bureau of Economic Research, Inc.
    4. Viral V. Acharya & Ouarda Merrouche, 2013. "Precautionary Hoarding of Liquidity and Interbank Markets: Evidence from the Subprime Crisis," Review of Finance, European Finance Association, vol. 17(1), pages 107-160.
    5. Erik P. Gilje & Elena Loutskina & Philip E. Strahan, 2016. "Exporting Liquidity: Branch Banking and Financial Integration," Journal of Finance, American Finance Association, vol. 71(3), pages 1159-1184, June.
    6. Thorsten Beck & Ross Levine & Alexey Levkov, 2010. "Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States," Journal of Finance, American Finance Association, vol. 65(5), pages 1637-1667, October.
    7. DeYoung, Robert & Glennon, Dennis & Nigro, Peter, 2008. "Borrower-lender distance, credit scoring, and loan performance: Evidence from informational-opaque small business borrowers," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 113-143, January.
    8. Astrid A. Dick, 2006. "Nationwide Branching and Its Impact on Market Structure, Quality, and Bank Performance," The Journal of Business, University of Chicago Press, vol. 79(2), pages 567-592, March.
    9. Becker, Bo, 2007. "Geographical segmentation of US capital markets," Journal of Financial Economics, Elsevier, vol. 85(1), pages 151-178, July.
    10. Rhys Bidder & John Krainer & Adam Shapiro, 2021. "De-leveraging or de-risking? How banks cope with loss," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 100-127, January.
    11. Morris, Stephen & Shim, Ilhyock & Shin, Hyun Song, 2017. "Redemption risk and cash hoarding by asset managers," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 71-87.
    12. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
    13. Landier, Augustin & Sraer, David & Thesmar, David, 2017. "Banking integration and house price co-movement," Journal of Financial Economics, Elsevier, vol. 125(1), pages 1-25.
    14. Rajan, Raghuram G, 1992. "Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    15. Huang, Rocco R., 2008. "Evaluating the real effect of bank branching deregulation: Comparing contiguous counties across US state borders," Journal of Financial Economics, Elsevier, vol. 87(3), pages 678-705, March.
    16. Eric S. Rosengren & Joe Peek, 2000. "Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States," American Economic Review, American Economic Association, vol. 90(1), pages 30-45, March.
    17. Jimmy Shek & Ilhyock Shim & Hyun Song Shin, 2018. "Investor Redemptions and Fund Manager Sales of Emerging Market Bonds: How Are They Related? [Borrow cheap, buy high? The determinants of leverage and pricing in buyouts]," Review of Finance, European Finance Association, vol. 22(1), pages 207-241.
    18. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 249-275.
    19. Teng Wang, 2019. "To Build or to Buy? The Role of Local Information in Credit Market Development," Management Science, INFORMS, vol. 65(12), pages 5838-5860, December.
    20. Philipp Schnabl, 2012. "The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market," Journal of Finance, American Finance Association, vol. 67(3), pages 897-932, June.
    21. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    22. Jith Jayaratne & Philip E. Strahan, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 639-670.
    23. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
    24. Xuemin (Sterling) Yan, 2006. "The Determinants and Implications of Mutual Fund Cash Holdings: Theory and Evidence," Financial Management, Financial Management Association International, vol. 35(2), pages 67-91, June.
    25. Jiang, Liangliang & Levine, Ross & Lin, Chen, 2019. "Competition and Bank Liquidity Creation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(2), pages 513-538, April.
    26. Shaffer, Sherrill, 1998. "The Winner's Curse in Banking," Journal of Financial Intermediation, Elsevier, vol. 7(4), pages 359-392, October.
    27. Teng Wang, 2017. "To Build or to Buy? The Role of Local Information in Credit Market Development," Finance and Economics Discussion Series 2017-013, Board of Governors of the Federal Reserve System (U.S.).
    28. Mikhail Simutin, 2014. "Cash Holdings and Mutual Fund Performance," Review of Finance, European Finance Association, vol. 18(4), pages 1425-1464.
    29. Viral V Acharya & Philipp Schnabl, 2010. "Do Global Banks Spread Global Imbalances? Asset-Backed Commercial Paper during the Financial Crisis of 2007–09," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(1), pages 37-73, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Teng, 2021. "Local banks and the effects of oil price shocks," Journal of Banking & Finance, Elsevier, vol. 125(C).
    2. Teng Wang, 2017. "To Build or to Buy? The Role of Local Information in Credit Market Development," Finance and Economics Discussion Series 2017-013, Board of Governors of the Federal Reserve System (U.S.).
    3. Masami Imai, 2008. "Crowding-Out Effects of a Government-Owned Depository Institution: Evidence from a Natural Experiment in Japan," Wesleyan Economics Working Papers 2008-003, Wesleyan University, Department of Economics.
    4. Teng Wang, 2019. "To Build or to Buy? The Role of Local Information in Credit Market Development," Management Science, INFORMS, vol. 65(12), pages 5838-5860, December.
    5. Berger, Allen N. & Molyneux, Phil & Wilson, John O.S., 2020. "Banks and the real economy: An assessment of the research," Journal of Corporate Finance, Elsevier, vol. 62(C).
    6. Wang, Teng, 2015. "Bank Entry Mode, Labor Market Flexibility and Economic Activity," HIT-REFINED Working Paper Series 25, Institute of Economic Research, Hitotsubashi University.
    7. Jiang, Tianjiao & Levine, Ross & Lin, Chen & Wei, Lai, 2020. "Bank deregulation and corporate risk," Journal of Corporate Finance, Elsevier, vol. 60(C).
    8. Hoffmann, Mathias & Okubo, Toshihiro, 2022. "‘By a silken thread’: Regional banking integration and credit reallocation during Japan's lost decade," Journal of International Economics, Elsevier, vol. 137(C).
    9. Kose John & Qianru Qi & Jing Wang, 2020. "Bank Integration and the Market for Corporate Control: Evidence from Cross-State Acquisitions," Management Science, INFORMS, vol. 66(7), pages 3277-3294, July.
    10. Choudhary, M. Ali & Jain, Anil, 2022. "Finance and inequality: The distributional impacts of bank credit rationing," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    11. Iyer, Rajkamal & Da-Rocha-Lopes, Samuel & Peydró, José-Luis & Schoar, Antoinette, 2014. "Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007-2009 Crisis," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 27(1), pages 347-372.
    12. Olivier De Jonghe & Hans Dewachter & Klaas Mulier & Steven Ongena & Glenn Schepens, 2020. "Some Borrowers Are More Equal than Others: Bank Funding Shocks and Credit Reallocation [A theory of systemic risk and design of prudential bank regulation]," Review of Finance, European Finance Association, vol. 24(1), pages 1-43.
    13. Masami Imai & Seitaro Takarabe, 2009. "Bank Integration and Local Credit Cycle:Evidence from Japan," Wesleyan Economics Working Papers 2009-002, Wesleyan University, Department of Economics.
    14. Kerr, William R. & Nanda, Ramana, 2009. "Democratizing entry: Banking deregulations, financing constraints, and entrepreneurship," Journal of Financial Economics, Elsevier, vol. 94(1), pages 124-149, October.
    15. Senay Agca & Pablo Slutzky & Stefan Zeume, 2021. "Anti-Money Laundering Enforcement, Banks, and the Real Economy," Working Papers 2021-20, The George Washington University, Institute for International Economic Policy.
    16. Erik P. Gilje, 2019. "Does Local Access to Finance Matter? Evidence from U.S. Oil and Natural Gas Shale Booms," Management Science, INFORMS, vol. 65(1), pages 1-18, January.
    17. William Mullins & Patricio Toro, 2018. "Credit Guarantees and New Bank Relationships," Working Papers Central Bank of Chile 820, Central Bank of Chile.
    18. Sedunov, John, 2020. "Small banks and consumer satisfaction," Journal of Corporate Finance, Elsevier, vol. 60(C).
    19. Smolyansky, Michael, 2019. "Policy externalities and banking integration," Journal of Financial Economics, Elsevier, vol. 132(3), pages 118-139.
    20. Viral V. Acharya & Jean Imbs & Jason Sturgess, 2011. "Finance and Efficiency: Do Bank Branching Regulations Matter?," Review of Finance, European Finance Association, vol. 15(1), pages 135-172.

    More about this item

    Keywords

    Bank competition; Oil shocks; Out-of-market lending; Transmission of shocks; SME lending;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2020-34. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.