Credit Market Power: Branch-level Evidence from the Great Financial Crisis

Abstract

This paper investigates the credit market power channel of macroeconomic transmission. I propose a novel measure of competition on the asset side of bank balance sheets by estimating demand elasticities across local U.S. credit markets. My empirical approach exploits within-bank cross- regional variation in weekly changes in branch-level interest rates during the Great Financial Crisis. The average nationwide elasticity is 1.2, a low value which is consistent with localized monopolistic competition in bank lending. I show that credit market power can have real economic implications: regional variation in elasticities was a good predictor of growth in small business lending, employment, output, wages, and establishment dynamism during the Financial Crisis. My results are robust to bank heterogeneity and measures of deposit market concentration.