Banking heterogeneity, credit supply and economic growth

This paper demonstrates the significance of heterogeneity in bank equity size as a key dimension for quantifying the effects of local credit supply on local economic outcomes. Using newly compiled datasets from over 5000 bank balance sheets, and mortgage and business loans in the United States, we offer novel empirical evidence on the role of bank equity size heterogeneity in how local bank lending impacts local economic activity. Our results show that accounting for the features of the lender, in particular, bank equity size heterogeneity, significantly amplifies the estimated economic effects of credit supply. The impact of mortgage lending on GDP growth can be up to 60 times larger compared to models that ignore lender heterogeneity, while the effect of business lending can be up to 18 times greater when bank equity size heterogeneity is taken into account. This difference in the size of the impact between business and mortgage lending may arise because credit allocation in the business lending channel is more influenced by risk-return trade-offs than by bank equity size.