Multimarket Banks, Local Economic Shocks, and Lending Behavior: When the Effect is on Cost but not on the Amount of Deposit Fundings

We investigate how local deposit shocks affect bank lending in nonaffected markets for the case where banks mostly neutralize that shock. Colombian banks in oil-producing municipalities experienced deposit outflows after the collapse of oil prices in 2014-2015. Following the shock, we observe that the affected banks increased their credit to non-oil producing markets by reducing the price of consumer loans and by using market power in both commercial and consumer loans. This paper contributes to understanding how multi market banks transmit local deposit shocks to other geographic markets to mitigate deposit outflows.