Credit Reallocation and Bank competition
[Draft available upon request]Â
This paper examines how competition among banks affects the allocation of credit across firms. I exploit the staggered interstate bank deregulation across U.S. states during the 1980s and 1990s to estimate the dynamics of credit flow responses to this policy shock using local projection. The results show a large increase in short-term credit creation immediately following an increase in bank competition, peaking at around 70 percent relative to the mean. However, short-term credit destruction peaks one year later. These results differ from earlier findings because I construct a more precise measure of policy-induced bank competition. Further analysis reveals that the long-term credit reallocation is primarily driven by larger and older firms.