This paper examines whether corporate bankruptcies influence the bank loan characteristics of geographically proximate firms. We find that, beyond industry contagion (Hertzel and Officer, 2012), firms headquartered near a bankruptcy event experience a 11 basis point increase in loan spreads over the subsequent year, even when the credit default risks of local firms do not increase. There is also a decrease in loan amounts and maturities, as well as an increase in the proportion of secured loans

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... and loan covenants among non-filing local firms. Local bankruptcy has a stronger impact on lenders with geographically concentrated loan portfolios, but even lenders with no exposure to the local economy increase their spreads. The adverse effects of bankruptcy weaken as the distance to bankrupt firms increases. Collectively, these results suggest that lenders are sensitive to local bankruptcies and induce geographic contagion in the bank loan market.