Synergy Between Taking-Deposits and Lending by Banks: Evidence from Small Business Financing

This paper empirically examines how firms choose their checking account service providers and how such choices affect credit contract terms. I find that firms' choices of checking accounts are negatively associated with geographical distance between banks and depositing firms but positively associated with durable banking relationship, implying that transportation costs and early accessibility dominantly explain checking account choices. More importantly, I find that an existing checking account from a lender significantly increase loan approval probability and reduces interest rates charged on lines of credit. In sum, the findings here are consistent with the assertion that synergetic benefits of deposit-taking and lending do exist and such benefits are passed on to borrowing firms.