Abstract
This paper studies credit booms exploiting the Spanish matched credit register over 2001–2009. We extend Khwaja and Mian’s (2008) loan-level estimator by incorporating firm-level general equilibrium adjustments. Higher ex-ante bank real-estate exposure increases credit supply to non-real-estate firms, but effects are neutralized by firm-level adjustments for firms with existing banking relationships. However, higher bank real-estate exposure increases risk-taking, by relaxing standards of existing borrowers (cheaper, longer-term and less collateralized credit), and by expanding credit on the extensive margin to first-time borrowers that default substantially more. Results suggest that the mechanism at work is greater liquidity via securitization of real-estate assets.
Highlights
A large literature connects financial crises with collapsing credit and asset price bubbles.1 A key mechanism linking such financial shocks to the real economy is the bank-lending channel which claims that financial shocks propagate to the real economy via banks’ credit supply channel
While the existing literature has largely focused on negative credit supply shocks, we focus our attention on credit booms, exploiting the boom in Spain fuelled by real estate, global capital flows and securitization
Consistent with the view that the credit supply effect is driven by a relaxation in bank liquidity constraints as opposed to a relaxation in bank capital constraints, we find that there is no difference in our main effects regardless of whether a bank issues covered bonds or asset backed securities (ABS) to take advantage of securitization
Summary
A large literature connects financial crises with collapsing credit and asset price bubbles. A key mechanism linking such financial shocks to the real economy is the bank-lending channel which claims that financial shocks propagate to the real economy via banks’ credit supply channel. There are several potential mechanisms that can lead banks with high real estate exposure to expand the supply of credit These include: (i) the joining of Euro that lowered risk spreads for Spain may disproportionately benefit banks with high real estate exposure; (ii) boom in real estate prices; and (iii) strong capital inflows due to global financial innovation that enabled securitization of real estate assets. Our results show no significant real effects at the firm level associated to credit supply booms, but strong bank risk-taking in booms with implications for financial stability. Our results reveal that while the bank transmission mechanism is strong, its aggregate (net) credit and real impact at the firm-level is substantially reduced due to the crowding out effects for large segments of the borrowers during booms.
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