Distance and Private Information in Lending

Using a unique data set of loan applications by small businesses, we study the determinants of loan transactions focusing on the respective roles of private information and borrower proximity. Although credit availability and the offered loan rate decrease in the bank-borrower distance and increase in the borrower-competitor distance, the inclusion of proxies for the bank's proprietary and private information reduces these effects to the point of insignificance. Analyzing loan rates and borrowers' decision to switch lenders we find strong evidence for the informational capture of good credit risks. Our results shed new light on the importance of soft information in informationally opaque credit markets and show how borrower proximity facilitates the production of proprietary intelligence that helps banks to exploit information asymmetries and to locally carve out captive markets.

Agarwal, Sumit and Hauswald, Robert B.H., Distance and Private Information (March 1, 2007). Available at SSRN: https://ssrn.com/abstract=996602 or http://dx.doi.org/10.2139/ssrn.996602