Affect Bank Lending Research Articles

An Empirical Sectoral Model of Unconventional Monetary Policy: The Impact of QE

This paper describes a sectoral empirical model of money and credit in the UK that can be used for analysing unconventional monetary policies that affect banks’ balance sheets. The paper uses the model to assess the impact of QE on the UK economy focussing on the endogenous portfolio response of banks, financial companies and non‐financial companies. The baseline results support the quantitative estimates found by other studies, but suggest the impact of QE is sensitive to the assumption about whether and to what extent QE affects bank lending.

Loan loss provisioning, bank credit and the real economy

This paper examines how credit risk affects bank lending and the business cycle. We estimate a panel Vector Autoregression model for an unbalanced sample of 12 OECD countries over the past two to three decades, consisting of the output gap, inflation, the short-term interest rate, bank lending, as well as loan loss provisioning by banks (as proxy for credit risk). Our main findings are that: (i) bank lending and loan loss provisioning are important drivers of business cycle fluctuations, (ii) loan loss provisioning decreases in relative terms as bank lending increases, and (iii) bank lending is primarily affected by output fluctuations.

Global transmission channels for international bank lending in the 2007–09 financial crisist

During a financial crisis, credit provision by international banks may be affected by three global channels: changes in willingness to lend from increased economic uncertainty, in funding availability from interbank liquidity markets, and in solvency from weakened balance sheets. In this paper, we examine the extent to which each channel affected bank lending in developing countries during the global financial crisis of 2007–09. We find evidence that the liquidity and uncertainty channels were important, although lending sensitivity to these channels remained unchanged during the crisis. We also find heterogeneity in the lending behavior of European versus U.S. banks.

Does banks’ dual holding affect bank lending and firms’ investment decisions? Evidence from China

This study investigates the effect of banks’ dual holding on bank lending and firms’ investment decisions using a sample of listed firms in China. We find that dual holding leads to easier access to bank loans, a result that is more pronounced for non-state-owned enterprises (non-SOEs) than SOEs. We also find that dual holding distorts banks’ lending decisions and harms the investment efficiency for SOEs, while resulting in optimal lending decisions and enhanced investment efficiency for non-SOEs. For non-SOEs, further analysis suggests that optimal lending decisions and efficient investment can be achieved for firms with higher ownership concentration, and firms in which the family and foreign investors are the controlling shareholders. We argue that, in emerging markets, whether a bank plays a monitoring role by directly holding the debt and equity claims of companies relies heavily on whether the potential collusion between firm executives and bank managers can be averted, which in turn is determined by the firms’ governance framework and ownership structure.

The effect of securitization on US bank lending and monetary policy transmission

Purpose– The purpose of this paper is to assess the effect of securitization on US bank lending and monetary policy transmission.Design/methodology/approach– The authors use a sample of 174 US commercial banks from 2001 to 2008 and regress the ratio of total loans per total assets on variables related to securitization activity, variables related to bank-specific characteristics, economic growth and monetary policy, as well as interaction terms that are the product of this variable with securitization and bank-specific characteristics. GLS and SUR techniques are used.Findings– The results show that a greater recourse to securitization is associated with an increase of US bank lending capacities. Furthermore, it makes banks (especially less liquid ones) less sensitive to a monetary tightening. The authors conclude that when securitization is used as a risk management tool, the efficacy of monetary actions is confirmed. However, when securitization is considered as a substitute for liquid assets, monetary actions become ineffective. So, an increase in federal rates cannot, in this case, affect bank lending.Originality/value– The paper contributes to a better understanding of how securitization affects bank lending and the effectiveness of monetary policy. The volume of securitized assets should now be considered as a part of traditional liquidity measures.

The effectiveness of non-standard monetary policy in addressing liquidity risk during the financial crisis: The experiences of the Federal Reserve and the European Central Bank

A number of studies sought to measure the effects of non-standard policy on bank funding markets. This paper carries those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending. By separately modeling loan supply and demand, we determine how non-standard central bank measures affected bank lending by reducing stress in bank funding markets. Our results suggest that non-standard policy measures lowered bank funding volatility in the US and the Euro Area. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustained lending activity.

Does Bankss Dual Holding Affect Bank Lending and Firm Investment Decisions Evidence from China?

This study investigates the effect of banks' dual holding on bank lending and firms' investment decisions using a sample of listed firms in China. We find that dual holding leads to easier access to bank loans, a result that is more pronounced for non-state-owned enterprises (non-SOEs) than SOEs. We also find that dual holding distorts banks' lending decisions and harms the investment efficiency for SOEs, while resulting in optimal lending decisions and enhanced investment efficiency for non-SOEs. For non-SOEs, further analysis suggests that optimal lending decisions and efficient investment can be achieved for firms with higher ownership concentration, and firms in which the family and foreign investors are the controlling shareholders. We argue that, in emerging markets, whether a bank plays a monitoring role by directly holding the debt and equity claims of companies relies heavily on whether the potential collusion between firm executives and bank managers can be averted, which in turn is determined by the firms’ governance framework and ownership structure.

Leverage Pro-cyclicality and Bank Balance Sheet in Colombia

The recent financial crisis has renewed the interest of economists, both at the theoretical and empirical level, in developing a better understanding of credit and its mechanisms. A rapidly growing strand of the literature views banks as facing funding restrictions that condition their borrowing to a risk-based capital constraint which, in turn, affects bank lending. This work explores the way banks in Colombia manage their balance sheet and sheds light into the dynamics of credit and leverage over the business cycle. Using a sample of monthly bank balance sheets for the period 1994–2011, we find not only that leverage is predominantly pro-cyclical in the Colombian banking sector, but also that heterogeneity matters, and thus, an aggregate measure of bank leverage can mask a fragile financial sector. In addition, although some banks display great dynamics on the right-hand side of their balance sheet during the upward phase of the leverage cycle, changes in the composition of liabilities between core and non-core do not seem to have a clear pattern. Still, more attention should be paid on this by policy makers, as these dynamics could convey information about the phase of the cycle of the economy and the financial vulnerability of the system as a whole.

Does Sovereign Credit Risk Affect Bank Lending? Evidence from Sovereign Rating Downgrades

We study the causal effect of bank credit rating downgrades on the supply of bank lending. The identification strategy exploits the asymmetric impact of sovereign downgrades on the ratings of banks at the sovereign bound relative to bank that are not at the bound as a result of rating agencies’ sovereign ceiling policies. This asymmetric effect leads to greater reductions in rating-sensitive funding and lending of banks at the bound relative to other banks. Results for foreign borrowers and within lender-borrower relationships confirm that credit demand does not explain our findings.

International Banking and Liquidity Risk Transmission: Lessons from Across Countries

Activities of international banks have been at the core of discussions on the causes and effects of the international financial crisis. Yet we know little about the actual magnitudes and mechanisms for transmission of liquidity shocks through international banks, including the reasons for heterogeneity in transmission across banks. The International Banking Research Network, established in 2012, brings together researchers from around the world with access to micro-level data on individual banks to analyze issues pertaining to global banks. This paper summarizes the common methodology and results of empirical studies conducted in eleven countries to explore liquidity risk transmission. Among the main results is, first, that explanatory power of the empirical model is higher for domestic lending than for international lending. Second, how liquidity risk affects bank lending depends on whether the banks are drawing on official-sector liquidity facilities. Third, liquidity management across global banks can be important for liquidity risk transmission into lending. Fourth, there is substantial heterogeneity in the balance sheet characteristics that affect banks’ responses to liquidity risk. Overall, balance sheet characteristics of banks matter for differentiating their lending responses, mainly in the realm of cross-border lending.

International Banking and Liquidity Risk Transmission: Lessons from Across Countries

Activities of international banks have been at the core of discussions on the causes and effects of the international financial crisis. Yet, we know little about the actual magnitudes and mechanisms for transmission of liquidity shocks through international banks, including the reasons for heterogeneity in transmission across banks. The International Banking Research Network (IBRN), established in 2012, brings together researchers from around the world with access to micro-data on individual banks to analyze issues pertaining to global banks. This paper summarizes the common methodology and results of empirical studies conducted in 11 countries to explore liquidity risk transmission. Among the main results is, first, that explanatory power of the empirical model is higher for domestic lending than for international lending. Second, how liquidity risk affects bank lending depends on the whether the banks are drawing on official sector liquidity facilities. Third, liquidity management across global banks can be important for liquidity risk transmission into lending. Fourth, there is substantial heterogeneity in the balance sheet characteristics that affect banks' responses to liquidity risk. Overall, bank balance sheet characteristics matter for differentiating lending responses across banks mainly in the realm of cross-border lending.

Monetary Policy and Bank Lending in China Evidence from Loan-Level Data

We investigate how monetary policy in a mixed financial system such as that of China, which is characterized by a juxtaposition of quantity- and price-based policy instruments and the co-existence of regulated and market-determined interest rates, affects bank lending. Using a newly constructed loan-level dataset, we find that loan rates but not loan size are affected by both the regulated and the market-determined interest rates and that loan size is instead affected by an implicit quota that is imposed on aggregate bank lending through window guidance. We interpret this finding to be evidence of credit rationing.

The Effectiveness of the Non-Standard Policy Measures During the Financial Crises: The Experiences of the Federal Reserve and the European Central Bank

A growing number of studies have sought to measure the effects of non-standard policy on bank funding markets. The purpose of this paper is to carry those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending, using a simultaneous equation approach. By separately modeling loan supply and demand, we determine how nonstandard central bank measures affected bank lending by reducing stress in bank funding markets. We focus on the Federal Reserve and the European Central Bank. Our results suggest that non-standard policy measures lowered bank funding volatility. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustain lending activity. We consider this as strong evidence for a “bank liquidity risk channel”, operative in crisis environments, which complements the usual channels of transmission of monetary policy. JEL Classification: E58, G32, G21

The Effectiveness of the Non-Standard Policy Measures during the Financial Crises: The Experiences of the Federal Reserve and the European Central Bank

A growing number of studies have sought to measure the effects of non-standard policy on bank funding markets. The purpose of this paper is to carry those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending, using a simultaneous equation approach. By separately modeling loan supply and demand, we determine how non-standard central bank measures affected bank lending by reducing stress in bank funding markets. We focus on the Federal Reserve and the European Central Bank. Our results suggest that non-standard policy measures lowered bank funding volatility. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustain lending activity. We consider this as strong evidence for a 'bank liquidity risk channel,' operative in crisis environments, which complements the usual channels of transmission of monetary policy.

IMPACT OF GLOBAL FINANCIAL SHOCK TO INTERNATIONAL BANK LENDING IN INDONESIA

This study intends to determine whether a shock that occurred in developed countries, the source of funding, was transmitted to Indonesia through international bank lending both directly and indirectly. The methods used estimated the determinants of international bank lending. International bank lending is one form of capital flows that have the potential for rapid reversal and that can lead to a financial crisis as it has in the past. Understanding the determinants of bank lending is important as it can be used to mitigate the impact of a financial crisis in the future. The empirical results showed that international bank lending, either directly or indirectly, contributed to the Indonesian crisis. During the shock, Indonesia saw global banking contract financing. It was also found that credit activities by foreign affiliates in Indonesia saw a contraction in the country of the parent bank during the shock. However, it was found that the bank lending by foreign affiliates, as joint ventureswere more stable compared to the branch offices of a foreign bank. In aggregate, international bank lending is affected by push and pulls factors such as economic growth (in developed countries and Indonesia), risk factors, and liquidity conditions, both in Indonesia and globally. As for micro-banking models, other than the push and pull factors, the bank balance sheet and other portfolio assets also affected bank lending activities to Indonesia.Keywords: Global Financial Shocks, Foreign Affiliates, International Bank Lending, transmission path,dynamic panel.JEL Classification: C33, E51, G15

IMPACT OF GLOBAL FINANCIAL SHOCK TO INTERNATIONAL BANK LENDING IN INDONESIA

This study intends to determine whether a shock that occurred in developed countries, the source of funding, was transmitted to Indonesia through international bank lending both directly and indirectly. The methods used estimated the determinants of international bank lending. International bank lending is one form of capital flows that have the potential for rapid reversal and that can lead to a financial crisis as it has in the past. Understanding the determinants of bank lending is important as it can be used to mitigate the impact of a financial crisis in the future. The empirical results showed that international bank lending, either directly or indirectly, contributed to the Indonesian crisis. During the shock, Indonesia saw global banking contract financing. It was also found that credit activities by foreign affiliates in Indonesia saw a contraction in the country of the parent bank during the shock. However, it was found that the bank lending by foreign affiliates, as joint ventureswere more stable compared to the branch offices of a foreign bank. In aggregate, international bank lending is affected by push and pulls factors such as economic growth (in developed countries and Indonesia), risk factors, and liquidity conditions, both in Indonesia and globally. As for micro-banking models, other than the push and pull factors, the bank balance sheet and other portfolio assets also affected bank lending activities to Indonesia. Keywords: Global Financial Shocks, Foreign Affiliates, International Bank Lending, transmission path,dynamic panel.JEL Classification: C33, E51, G15

Influence of real estate prices on domestic bank loans in Southeast Asia

This study examines whether and how fluctuations in real estate prices affected bank lending in Malaysia, Singapore, and Thailand before and after the 1997–98 Asian financial crisis. Since the crisis, it has been claimed that the rise and fall in the price of real estate, which is used as collateral, affected bank lending and the macroeconomy in these Southeast Asian countries. The study implements a dynamic model of bank lending and employs a test using the panel data of domestic bank balance sheets in order to estimate the influence of real estate prices on new bank lending in the three countries. The study also examines the conditions surrounding the role of real estate as collateral for bank loans in the countries. The regression results suggest that fluctuations in real estate prices can influence domestic bank lending and did so, especially after the crisis in Singapore and Thailand, and that domestic bank lending behaviour in these countries changed after the crisis.

Corporate globalization and bank lending

This paper investigates the effect of corporate globalization on bank loan contracts, as reflected in both price and non-price loan terms. We show that globally diversified firms receive more favorable valuation from creditors than domestic firms do. Specifically, we find strong evidence that global firms are charged lower loan rates, and are spared the more restrictive non-price contractual terms such as short maturity and collateral requirements. Our results are robust to various extensions, including controlling for firms’ endogenous choice of globalization, recognizing the joint determination of loan terms, and using alternative measures of global diversification. Our study contributes to the international business literature as the first comprehensive investigation of how global diversification affects bank lending.

How Did the Crisis in International Funding Markets Affect Bank Lending? Balance Sheet Evidence from the UK

Evidence abounds on the propagation of financial stresses originating in the US mortgage market to banking systems worldwide through international funding markets. But the transmission of this external funding shock to the real economy via bank lending is surprisingly under-examined, given the central importance ascribed to this channel of contagion by policymakers. This paper provides evidence of this transmission for the UK-resident banking system, the largest in the world by asset size. It uses a novel dataset, created from detailed balance sheet data reported by resident banks quarterly to the Bank of England. It finds that the shock to foreign funding during the financial crisis caused a substantial pullback in domestic lending. A range of instrumental variables are used to correct for endogeneity and omitted variable bias, and the results are robust to various sensitivity tests. Resident subsidiaries and branches of foreign-owned banks reduced lending by a larger amount than domestically-owned banks, while the latter calibrated the reduction in domestic lending more closely to the size of the funding shock.

How Did the Crisis in International Funding Markets Affect Bank Lending? Balance Sheet Evidence from the United Kingdom

Evidence abounds on the propagation of financial stresses originating in the US mortgage market to banking systems worldwide through international funding markets. But the transmission of this external funding shock to the real economy via bank lending is surprisingly underexamined, given the central importance ascribed to this channel of contagion by policymakers. This paper provides evidence of this transmission for the UK-resident banking system, the largest in the world by asset size. It uses a novel data set, created from detailed and confidential balance sheet data reported by individual banks quarterly to the Bank of England. I find that the shock to foreign funding caused a substantial pullback in domestic lending. The results are derived using a range of instruments to correct for endogeneity and omitted variable bias. Foreign subsidiaries and branches reduced lending by a larger amount than domestically owned banks, while the latter calibrated the reduction in domestic lending more closely to the size of the funding shock.