The decline in cash use and growing use of digital distribution for retail banking leads

to a reduced need for bank branches. Lending to small and medium sized firms (SMEs)

has not benefited as much from a digital transformation, however, and widespread

branch closures may reduce their supply of credit. Using the closing of two thirds of

Swedish branches as a laboratory, we document that corporate lending declines rapidly

following branch closures, mainly via reduced lending to small, collateral-poor, and risky firms. The reduced credit supply has real effects: local firms experience a decline in employment and sales and an increase in exit risk after branch closures. Our results thus suggest that the disappearance of bank branches have far-reaching implications for the economy.

We study the internal and external capital markets of large U.S. bank holding companies. Within the bank holding company, commercial bank and dealer divisions have different investment opportunities, raise capital externally and actively share some capital internally. We develop and test a simple model where a bank division raises funding from both internal and external capital markets subject to frictions. Empirically, we measure marginal returns to dealer investment opportunities using arbitrage spreads. We show that when spreads widen, the dealer raises additional capital through both internal and external markets. The dealer raises 3 times more capital internally than externally, implying that there are larger frictions to external capital. However, both sources of additional capital are slow to respond to investment opportunities. These internal and external frictions cause capital to be partially segmented. As a result, capital directly held by the dealer price its own investment opportunities, even when controlling for the liquidity of the bank holding company.

Banks are comprised of contracts. For a bank to finance productive investment by issuing riskless, money-like claims, its organizational structure (e.g., sole proprietorship, partnership, or public ownership), capital structure, and its bankers' compensation contracts must be jointly designed to induce banker effort and discourage risk-taking. Our model explains why bankers receive high pay for producing mediocre outcomes, and why pure charter value (or market value of equity) is insufficient to prevent banker risk-taking. Outside shareholders, contributing book equity, are useful despite introducing another layer of agency problems. It is efficient for shareholders to create a `big' bank with multiple bankers and their respective projects and finance those projects with joint liabilities. When bankers' incentive contracts are opaque, each banker's pay should depend on the entire bank's performance even though he exerts control only on his own project.