Proximity in Bank-Borrower Relationships. Are Small and Newly Established Firms Hit Harder by Bank Branch Closures?

In this paper, we use an empirical approach to provide evidence on the topic of relationship lending, by analysing if small and newly established firms are hit harder by a regional bank withdrawal. We use comprehensive data from the Norwegian banking market, containing information on 127 banks and approximately 70,000 firms. We find that small and newly established firms receive an increase in average interest rate of 2 percentage points after a bank withdrawal. This is 1.7 percentage points higher than for large and mature firms. Small and newly established firms also experience a decrease in debt ratio of 0.027, while the decrease is even more substantial for large and mature firms. Our findings indicate that small and newly established firms are hit harder in terms of increased interest rate, while the decrease in debt ratio could be caused by changes in credit supply or demand. The effects imposed on small and newly established firms do not seem to affect the firms’ growth, indicating that firms are able to withstand the increased interest rate.