Bank Heterogeneity and Capital Allocation: Evidence from "Fracking" Shocks
Revised: February 2015
JEL classification: G21, E32
This paper empirically investigates banks’ ability to reallocate capital. I use unconventional energy development to identify unsolicited deposit inflows and then I estimate how banks allocate these deposits over the recent business cycle. To condition on credit demand, I compare banks’ allocations within affected areas over time and in the cross section. When conditions deteriorate, liquid asset allocations increase and loan allocations decrease. Banks with fewer funding sources and higher capital ratios reduce loan allocations more than nearby peers. My results suggest that during adverse times, precautionary liquidity and risk aversion can impede capital reallocation by banks, even in a developed economy.