Essays on Banks' Geographic Expansion, Transmission of Trade Shocks, and Survival with Bailouts

Abstract

This dissertation consists of three empirical studies on the US banking sector since the 1980s. Chapter 1 examines the effects of lending frictions on banks' geographic expansion. Investigating banks' expansion patterns following the US interstate banking deregulation, I find that banks are more likely to enter new locations where more firms are familiar old neighbours. These firms already operate in the bank's original neighbourhoods. This result is consistent with frictions in bank-firm lending relationships, likely driven by information asymmetries between lenders and borrowers. Moreover, I document that lending frictions generate heterogeneous effects of banking deregulation on economic growth. Locations where more firms are familiar to out-of-state banks witness more entries, receive more credits, and enjoy higher employment growth. Large firms benefit more than small businesses. These findings carry important policy implications for effective and equitable financial reforms. Chapter 2 studies the effects of trade shocks on banks' deposit and lending outcomes, as well as the real economic consequences. Exploiting the event of China's accession to WTO and the subsequent increase of US imports from China, I find that banks with higher exposure to the trade shocks, due to branch operations in areas with high concentration of manufacturing industries, experience lower deposit growth and reduce mortgage origination. At the county level, aggregate mortgage credits decline for counties borrowed more from exposed banks prior to the shock, leading to negative employment effects on the non-tradable construction industry. Chapter 3 investigates the effects of government bailouts on banks' survival during the financial crisis. I estimate the survival rates of US commercial banks during the 2007 crisis when the Treasury initiated the Capital Purchase Program to stabilise the banking sector. The evidence shows that the capital injection indeed reduced the failure rate of bailed-out institutions. However, these effects may have been short-lived. The failure rates of capital recipients quickly caught up with the non-recipients after the peak of the crisis. They also had a substantially higher chance of being acquired, overwhelming the lower failure rate and resulting in a higher overall exit rate. Management inefficiency and political pressures may be potential explanations.