Finance: Research, Policy and Anecdotes

One of the papers I co-authored during the Covid crisis was just accepted at the Journal of Corporate Finance. In this paper, with Jan Keil, we exploit geographic variation in the exposure of US banks to COVID-19 and lockdown policies using branch network and branch-level deposit data to gauge the effect of the pandemic on bank stability and lending. First, we find that banks geographically more exposed to lockdown measures experience an increase in loss provisions and nonperforming loans. Exposures to the pandemic itself have a similar, but slightly weaker effect. Second, we observe an increase in small business lending driven by government-guaranteed loans which seem to replace regular loans. Interestingly, lenders more exposed to lockdown measures rely more on government-guaranteed loans – even when controlling for borrower exposure.  Finally, we observe a reduction in the number and average amount of syndicated loans for banks more affected by the pandemic, as well as an increase in interest spreads. Overall, these findings point to a negative impact of the pandemic on the supply side of finance, to previously unknown side effects of government support, and to the critical role of banks in channeling government support measures to small firms.  On a final note, while the original title of the paper was: Are Banks Catching Corona?, we decided to change it to: Have Banks Caught Corona? to reflect that the initial effect of the pandemic has certainly turned into longer-term effects on the banking system, a challenge I have written extensively about in other context.

Overview