The Causal Impact of Distance on Bank Lending

We investigate the role of physical distance in corporate lending by exploiting infrastructure improvements as shocks to travel time. Lower travel time increases the likelihood of initiating a new banking relationship, consistent with an economic surplus from lower transaction costs. In existing lending relationships, banks capture part of this surplus by increasing interest rates, in particular, if banks have higher bargaining power. Reductions in travel time to competing banks have the opposite effects. Banks benefit from improved infrastructure through an increase in clients, and lenders that rely more on technology do not exhibit sensitivity to changes in distance.

Automated summary

Our study investigates the impact of physical distance on corporate lending, using infrastructure improvements as shocks to travel time. We find that lower travel time increases the likelihood of establishing new banking relationships, indicating that there is an economic surplus from reduced transaction costs. In existing lending relationships, banks capture part of this surplus by raising interest rates, particularly when they have more bargaining power. However, reductions in travel time to competing banks have the opposite effects. Banks benefit from improved infrastructure by attracting more clients, and lenders relying on technology are not sensitive to changes in distance.