Credit Allocation in Banking: Regulation, Competition, and Real Economic Effects

Abstract

This dissertation studies how regulatory reform and technological disruption reshape bank behavior and how these changes transmit to credit allocation, trade, and financial stability. Across three chapters, I examine how geographic deregulation, targeted credit expansion, and FinTech competition alter banks’ structure, funding costs, and loan portfolio decisions, with implications for real economic outcomes. Chapter 1 examines the real effects of credit supply. We examine how expansions in local credit availability, particularly through Community Reinvestment Act (CRA) lending, affect export performance at the metropolitan level. Using the geographic dispersion of bank headquarters as an instrument for local credit supply, we find that a 10 percent increase in credit availability raises export volumes by approximately 4.5 percent. Embedding these empirical results in a heterogeneous-firm trade model with credit frictions, we show that financial constraints materially dampen gains from trade: a 10 percent reduction in trade costs generates welfare gains that are nearly 19 percent larger when firms are unconstrained by credit. These results underscore the central role of financial access in shaping trade and aggregate welfare. Chapter 2 analyzes the intrastate geographic expansion of U.S. banks following deregulation. While prior research largely focuses on interstate banking reforms, most banks historically expanded within state borders. We construct a novel intrastate deregulation index and develop a research design that exploits staggered regulatory changes across states to identify causal effects. Using a gravity framework to model banks’ within-state deposit expansion and instrumenting expansion with the deregulation index, we estimate the impact of geographic diversification on banks’ cost of funds. The findings indicate that intrastate deregulation significantly reduced funding costs and reshaped competitive conditions. We further explore mediating channels—including market power and internal risk diversification—to clarify the mechanisms through which regulatory loosening affected bank outcomes. Chapter 3 examines how community banks adjust their loan portfolios in response to FinTech competition. Using LendingClub originations combined with Call Reports and branch-level deposits from the FDIC Summary of Deposits, I construct a bank–quarter measure of FinTech exposure based on marketplace lending intensity in a bank’s geographic footprint. I find that greater FinTech exposure increases loan portfolio concentration, with the effect strongest for smaller banks. Banks reallocate away from consumer and small-business lending toward agricultural and residential real estate lending, consistent with shifting toward relationship-intensive or collateral-backed segments. FinTech exposure is associated with higher non-performing loans overall, but the increase is attenuated for banks that specialize more, indicating that portfolio adjustments partly mediate the risk effects of FinTech competition.