Do local bank offices increase credit supply to nearby firms?

This paper studies the firm effects on local bank presence. The results show that that local bank offices do increase credit supply for nearby firms.

A local presence of bank offices might increase firms access to credit due to a reduction in asymmetric information. When the bank clerk has good knowledge of the surrounding entrepreneurs, this reduces his risk of borrowing. But is difficult to separate this effect from the fact that a large presence of bank offices indicates that the region is economically healthy and growing. To solve this empirical challenge, we use lending from Almi Företagspartner AB and relates this lending to the local presence of bank offices. Since Almi specifically lends to firms that otherwise cannot borrow their entire sum from commercial banks, these firms are credit constrained and we can see how the number of nearby banks affect them.

By combining our data on Almi with data on all the local work places in Sweden, we have information both on the firms that borrow from Almi as well as the number of bank offices in their region. This data allows us to use regression analysis on how the presence of local bank offices affects Almi variables such as the amount of lending and relate this to both firm variables and regional bank variables. We also use an instrument variable approach to control for the fact that the presence of local bank offices is affected by other factors that in turn affects local firm’s ability to borrow.

The analysis finds that more local bank offices increases lending from Almi and decreases the interest rate of Almis loans. This suggests that local bank offices push the credit supply curve outwards, increasing credit access and decreasing the price.

This in turn means that there are positive effects from the presence of local bank offices for firm’s access to credit supply. Given that Swedish commercial banks have reduced their number of bank offices to a substantial degree the last decades, this might have negative effects on firm’s access to credit. However, new alternatives to bank lending is growing and it is unclear if the total access to credit in Sweden has decrease. Further studies are necessary to give a complete picture of the credit access for small and medium sized firms in Sweden.

This memo is a part of the larger project ”Hur kan statliga lån komplettera de privata kreditmarknaderna?” and part of Growth Analysis ongoing work on capital markets for Swedish enterprises.

Do local bank offices increase credit supply to nearby firms?

Serial number: PM 2019:11

Reference number: 2019/040

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