Distance Still Matters : Local Bank Closures and Credit Availability

In recent years, commercial banks have substantially reduced the number of theirbranch offices. We address the question of whether or not the increased distance tolenders caused by branch office closures translates into a lower credit supply for smalland medium sized enterprises (SMEs). We use a unique dataset based on 33,000 loancontracts from a state-owned Swedish bank designed to support credit-constrainedSMEs, and relate loan size and the interest rate to the number of nearby commercialbank offices. We use an IV strategy to account for potential endogeneity of the numberof banks in a region. In line with previous studies, we find that interest rates increasewith distance, while loan size decreases with distance. Thus, a larger number of localbank offices increases the local credit supply, and thereby reduces credit constraints ofnearby SMEs