Working Paper

To Build or to Buy? The Role of Local Information in Credit Market Development

Abstract: Exploiting the heterogeneity in legal constraints on local bank employees' mobility, I show that access to local information influences banks' modes of expansion. Banks entering a new market typically establish new branches directly when interbank labor mobility is less restrictive but acquire incumbent branches otherwise. The treatment effect is strengthened when information asymmetries between local and entrants are severe. Furthermore, I find a surge in the total amount of local small business and mortgage loans granted, a higher mortgage approval rate, and a reduction of mortgage rates by surrounding incumbent branches, precisely around the period of entrants establishing new branches, which indicate intensified competition among banks.

Keywords: Credit market development; Labor mobility; Local information;

https://doi.org/10.17016/FEDS.2017.013

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2017-02

Number: 2017-013

Pages: 40 pages