Bank Lending Supply Research Articles

European banking sector and bank lending amid COVID-19

The unprecedented economic impact of the COVID-19 pandemic might also have a negative impact on banks. Banks in the euro area play an important role as the main source of external financing for the private sector. Hence, the negative impact of COVID-19 could translate into both deeper economic contraction and hinder banks’ ability to finance the post-pandemic economic recovery. Therefore, this study provides a review of the bank lending and banking sector situation in the first year of the pandemic. It presents changes in bank lending and conducts a descriptive analysis on the following main potential determinants of bank lending growth during the pandemic: bank lending supply and demand, public sector lending guarantee schemes and monetary policy easing. It also describes how the overall situation of the banking sector was influenced and the perspectives for the medium term. The descriptive analysis is complemented with a simple econometric analysis on the determinants of bank lending across the euro area countries.

ECB’s unconventional monetary policy and bank lending supply and performance in the euro area

This paper examines the impact of the European Central Bank’s unconventional monetary policy (UMP) on bank lending supply and performance in the euro area, through comparing the evolution of bank-specific variables before and after the UMP implementation. By using a dynamic panel data analysis on banks across discrete country groups (euro zone, core, peripheral) and by controlling for bank-specific and country-level variables, we provide evidence that the bank lending decisions and performance of euro zone banks are not UMP driven, implying the limited ability of the ECB to enhance the effectiveness of banks’ lending channel and to affect banks’ profitability during the crisis. Our findings also suggest that different criteria determine banks’ lending strategy before the UMP period, bank credit strategies vary across the country samples, while the weaker economies’ banks seem to underestimate the impact of liquidity risk on their lending activity.

Dynamism Diminished: The Role of Housing Markets and Credit Conditions

The Great Recession and its aftermath saw the worst relative performance of young firms in at least 35 years. More broadly, as we show, young-firm activity shares move strongly with local economic conditions and local house price growth. In this light, we assess the effects of housing prices and credit supply on young-firm activity. Our panel IV estimation on MSA-level data yields large effects of local house price changes on local young-firm employment growth and employment shares and a separate, smaller role for locally exogenous shifts in bank lending supply. A novel test shows that house price effects work through wealth, liquidity and collateral effects on the propensity to start new firms and expand young ones. Aggregating local effects to the national level, housing market ups and downs play a major role – as transmission channel and driving force – in medium-run fluctuations in young-firm employment shares in recent decades. The great housing bust after 2006 largely drove the cyclical collapse of young-firm activity during the Great Recession, reinforced by a contraction in bank loan supply. As we also show, when the young-firm activity share falls (rises), local employment shifts strongly away from (towards) younger and less-educated workers.

The effects of bank ownership on lending behaviour for different types of loans throughout the business cycle

AbstractThis paper examines the correlation between banks' ownership structure and lending behaviour in China using micro‐level data on China's banks during the 2003–2015 period to identify possible different patterns in bank lending supply responses to changes in the economic environment, with a focus on understanding whether bank lending patterns follow procyclical or countercyclical allocation rules. We analyse how different types of loans correlate with bank ownership and find that state‐owned banks and banks with relatively higher levels of government ownership follow more countercyclical lending allocation rules, which indicates that China's government uses the financial sector as an instrument to mitigate procyclicality in lending behaviour. We further find that the loan allocation patterns vary significantly for different types of loans in China. In particular, individual consumer loans and corporate loans exhibit clear countercyclical patterns—particularly among state‐owned banks—while residential mortgages show much smoother patterns over time and seem to be less affected by the business cycle.

Effects of Bank Lending on Urban Housing Prices for Sustainable Development: A Panel Analysis of Chinese Cities

Stable home prices are critical to a healthy housing market and sustainable development. Home prices in many Chinese cities have increased dramatically in past decades. The China’s central bank uses two primary monetary controls on overheated housing prices: the bank lending supply and lending rate. However, little to no evidence informs whether the nation-level bank lending controls are effective at the city level. Unlike extant studies that only focus on nation-level effects of such controls, this research analyzes long-run effects on housing prices at the national, regional, and city levels. The authors perform cross-sectional time-series regressions on empirical data from 35 major Chinese cities for the period 2003 to 2015. Results confirm that controlling lending rates is effective as a long-term measure at the national, regional, and city levels, whereas controlling the lending supply is effective as a short-term measure for many cities. Results also reveal that housing prices cause lending supply changes for many regions in a long run and indicate that credit policy often lags in response to housing price changes. Findings show that the effectiveness of bank lending largely varies at the city level, suggesting city-tailed bank lending rather than the centralized controls at the national level.

Capital Market Access and Cash Flow Allocation During the Financial Crisis

Being a publicly listed firm is associated with costs and benefits related to investment, financing, and payout policies. To understand how a stock market listing influences the joint decisions on these corporate policies we analyze how European public and matched private firms adjust their cash flow allocation in response to the exogenous bank lending supply shock during the 2007-2009 financial crisis. Our novel empirical design allows us to analyze inter-dependent cash flow allocation adjustments within the cash flow identity. We find that both public and matched private firms heavily reduce their investments, financing, and payouts during the financial crisis. While investment adjustments are identical, public firms net issue more long-term debt to maintain relatively more payouts and repurchase stock.Our results suggest that while a stock market listing relaxes financial constraints, a listing induces managers to cater to shareholders by smoothing payouts and shoring up stock through repurchases. We find that the pressure on public firms to be more stock-market focused is greater in market-based economies. By contrast, in bank-dependent economies, public firms behave more sensibly: they invest relatively more and engage less in smoothing payouts and repurchasing stock.

Bank Supply Shocks and Default Risk

We examine the mechanism through which a financial crisis affects the default risk of real economy firms. Specifically, firms with strong dependence on bank financing suffer higher increases in default risk than firms with no such dependence. Conversely, firms relying solely on financing from public-debt markets do not experience significant increases in default risk. These findings suggest that the bank supply shock theory helps to understand the transmission channel of shocks from the financial sector to the real economy. Finally, bank-dependent firms cannot completely offset adverse impacts stemming from bank-lending supply shocks by substituting bank loans with publicly traded debts.

Does bank ownership affect lending behavior? Evidence from the Euro area

We analyze the differences in lending policies across banks characterized by different types of ownership, using micro-level data on Euro area banks during the period 1999–2011 to detect possible variations in bank lending supply responses to changes in monetary policy. Our results identify a general difference between stakeholder and shareholder banks: following a monetary policy contraction, stakeholder banks decrease their loan supply to a lesser extent than shareholder banks. A detailed analysis of the effect among stakeholder banks reveals that cooperative banks continued to smooth the impact of tighter monetary policy on their lending during the crisis period (2008–2011), whereas savings banks did not. Stakeholder banks’ propensity to smooth their lending cycles suggests that their presence in the economy has the potential to reduce credit supply volatility.

Does a large loss of bank capital cause Evergreening? Evidence from Japan

Using the real estate lending share of the bank’s loan portfolio at the peak of the land-price bubble as an instrument for bank capital, we identify the impact of capital adequacy on the allocation of bank lending under the Basel regulatory framework. We find that, in Japan, a large loss of bank capital caused by the regulator’s excessively tough stance towards banks not only induced the contraction of the bank lending supply but also the banks’ reallocation of their lending portfolios to financially unhealthy industries with a higher concentration of non-performing loans.

Bank Capital Requirement and the Effectiveness of Monetary Policy: A Literature Review

This paper reviews literature exploring capital adequacy requirements' impact on monetary policy effectiveness. It reviews main theories on bank lending supply through which capital requirements affect monetary policy effectiveness, and finds that a binding risk-based capital requirement affect the strength of monetary shocks. Moreover, with a binding capital requirement, the effects on bank lending supply depend on the size, the capital level, the balance sheet liquidity of banks and the capital distribution and market structure in the banking sector. The paper also reviews empirical findings which suggest that capital requirement is one reason for the credit crunch in the U.S. and Japan. After that, the paper reviews predictions on the impact of the Basel II on the effectiveness of monetary policy.

Does a Large Loss of Bank Capital Cause Ever-greening or Flight to Quality?: Evidence from Japan

Constructing a strong and unique instrument for bank capital from the empirical observation of Japanese banks’ past behavioral changes, we identify the impact of capital adequacy on the allocation of bank lending supply across low quality and high quality borrowers. We find that, in FY 1997, a large loss of capital resulting from the regulator’s tougher stance against banks induced banks to rebalance their lending portfolio toward low quality borrowers. Our findings also suggest that the public recapitalization of banks in FY 1998 effectively helped banks abandon the assistance of such zombies.