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31-12-2022

Multimarket Banks, Local Economic Shocks, and Lending Behavior: When the Effect is on Cost but not on the Amount of Deposit Fundings

Authors: Davide Castellani, Elisa Giaretta

Published in: Journal of Financial Services Research

Abstract

We investigate how local deposit shocks affect bank lending in nonaffected markets for the case where banks mostly neutralize that shock. Colombian banks in oil-producing municipalities experienced deposit outflows after the collapse of oil prices in 2014–2015. Following the shock, we observe that the affected banks increased their credit to non-oil-producing markets by reducing the price of consumer loans and by using market power in both commercial and consumer loans. This paper contributes to understanding how multimarket banks transmit local deposit shocks to other geographic markets to mitigate deposit outflows.

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In 2013, Colombia represented approximately 1.1% of the total global oil production.

“Certificado de Depósito a Término fijo” (CDT) and “Certificado de Depósito de Ahorro a Término fijo” (CDAT).

An important share of the oil production takes place in the Andes foothills and in the eastern Amazonian jungles. Another important production area is in the Meta Department of central Colombia. The Llanos basin contains the Rubiales oilfield that is the largest producing oil field in the country.

https://www.weforum.org/agenda/2016/03/what-s-behind-the-drop-in-oil-prices/

https://www.bbc.com/mundo/noticias/2015/08/150730_colombia_economia_crisis_puerto_gaitan_petroleo_nc

How this variable is built is explained further below in the text.

See Williams (2018) and Slutzky et al. (2020).

The average number of commercial banks with operations in Colombia in the period of analysis (Q12011-Q42016) was 20. One bank, Banco Colombia Procredit SA, was excluded from the sample because this bank had only one branch during the period considered.

We also add a dummy variable to control for potential data distortion due to a bank merger that occurred during the period of analysis.

These control variables are very similar to those used in related studies: for instance, Wang (2021) controls for the size, liquidity, ROA, and capital ratio of banks; while Gilje et al. (2016) adds the log of bank’s assets, deposit-to-asset ratio, liquid asset ratio, and a set of ratios for the composition of the loan portfolio. In our approach, besides controlling for the size, liquidity, profitability, and leverage of banks, we also control for the quality of the loan portfolio (i.e., NPL ratio).

Based on the explanations of the authors. Moreover, savings and checking deposits constituted 64% and 0.4% of total deposits in the commercial banking system, respectively. Savings deposits are the most common deposit product in Colombia.

Our measures were built following an approach similar to De Jonghe et al. (2020)

The statistical significance of the estimates does not change if we cluster the standard errors at the bank level instead of the bank-municipality level.

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Title: Multimarket Banks, Local Economic Shocks, and Lending Behavior: When the Effect is on Cost but not on the Amount of Deposit Fundings
Authors: Davide Castellani
Elisa Giaretta
Publication date: 31-12-2022
Publisher: Springer US
Published in: Journal of Financial Services Research
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-022-00395-y