Credit Demand Shocks Research Articles

Credit Supply or Demand? The Changing Role of Structural Market Forces in Bank Lending*

ABSTRACT Recent crises have shown that disruptions in credit markets can have serious macroeconomic consequences. This paper aims to assess the structural drivers of the bank lending market to non-financial corporations using the structural VAR methodology in a small, open, and bank-based euro area economy – Slovakia. The results show that credit demand shocks (loans demanded by firms) are at least as important as credit supply shocks (loans supplied by banks) in the lending market, and that this importance changes over the cycle. These findings have important policy implications, as responding to these shocks may require different policy measures.

International Housing Returns around the Financial Crisis: Disentangling Credit Supply and Demand Shocks

We use the price and quantity of credit to distinguish credit supply shocks from credit demand shocks to examine international housing returns around the financial crisis. We find little evidence to support three popular credit supply explanations for the run-up in international housing prices before the financial crisis. Importantly, we show that common credit supply proxies often represent credit demand shocks because they only capture quantity supplied but ignore price. Furthermore, credit demand shocks are more common than supply shocks in countries that experience a housing reversal. While we do find that credit supply plays a role in the housing run-up, the impact of credit supply shocks on housing prices during the run-up is primarily through negative shocks driving prices down, rather than the positive supply shocks driving them up.

Do Credit Supply Shocks Affect Employment in Middle-Income Countries?

This paper studies the extent to which increases in bank credit supply available for small and medium firms can foster formal employment in Mexico. We use a detailed dataset containing loan-level information for all loans extended by commercial banks to private firms in Mexico during the 2010-2016 period, when the economy was relatively stable. To obtain exogenous variation in credit supply, we exploit differences in the regional presence of Mexican banks across local labor markets by combining pre-existing market shares with national-level changes in banks’ credit supply, after accounting for local credit demand shocks. Then, we use employment registry data to compare changes in the number of formal workers registered by small and medium firms in local labor markets differently exposed to these shocks. We find that credit supply shocks have a large impact on formal employment: a positive credit shock of one standard deviation increases yearly employment growth by 0.45 percentage points (13 percent of the mean). Our results differ from the null to small effects identified by previous literature for developed countries, suggesting that credit supply shocks play a more prominent role for employment creation (and destruction) in low and middle-income countries.

The Real Effects of Bank Capital Requirements

We measure the impact of bank capital requirements on corporate borrowing and investment using loan-level data. The Basel II regulatory framework makes capital requirements vary across both banks and across firms, which allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find that a 1 percentage point increase in capital requirements reduces lending by 10%. Firms can attenuate this reduction by substituting borrowing across banks, but only partially. The resulting reduction in borrowing capacity impacts investment, but not working capital: Fixed assets are reduced by 2.6%, but lending to customers is unaffected.

Credit Shocks and Macroeconomic Fluctuations in Emerging Markets

In this paper, we examine the role of global and domestic credit supply shocks in macroeconomic fluctuations for Emerging Markets. For this purpose, we impose a set of zero and sign restrictions within a medium-scale Bayesian Vector Auto-Regressive model. Quarterly data from South Africa and G-7 countries in 1985-2010 show that credit supply shocks impact significantly on macroeconomic aggregates in these economies. However, credit supply shocks have played, on average, a less important role than credit demand shocks. Moreover, shocks originating from G7-countries are the main drivers of real activity in South Africa, although they played a marginal role in the 1996-1999 South African recession.

Systemic Real and Financial Risks: Measurement, Forecasting, and Stress Testing

Building on De Nicolo and Lucchetta (2010), this paper presents a novel modeling framework that delivers: (a) forecasts of indicators of systemic real risk and systemic financial risk based on density forecasts of indicators of real activity and financial health; (b) reduced-form stress tests as historical simulations; and (c) structural stress-tests as impulse responses of systemic risk indicators to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets of quarterly time series of the G-7 economies in 1980Q1-2010Q2. We show that the model exhibits significant out-of sample forecasting power for tail real and financial risk realizations in each country. Furthermore, reduced-form stress tests, as well as structural stress tests in which aggregate demand shocks and bank credit demand shocks are identified as the main drivers of cycles in real activity and bank lending, provide significant early warnings on the build-up of real and financial vulnerabilities.

Systemic Risks and the Macroeconomy

This paper presents a modeling framework that delivers joint forecasts of indicators of systemic real risk and systemic financial risk, as well as stress-tests of these indicators as impulse responses to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets of quarterly time series of indicators of financial and real activity for the G-7 economies for the 1980Q1-2009Q3 period. We obtain two main results. First, there is evidence of out-of sample forecasting power for tail risk realizations of real activity for several countries, suggesting the usefulness of the model as a risk monitoring tool. Second, in all countries aggregate demand shocks are the main drivers of the real cycle, and bank credit demand shocks are the main drivers of the bank lending cycle. These results challenge the common wisdom that constraints in the aggregate supply of credit have been a key driver of the sharp downturn in real activity experienced by the G-7 economies in 2008Q4- 2009Q1.

Bank Integration and State Business Cycles

We investigate how integration of bank ownership across states has affected economic volatility within states. In theory, bank integration could cause higher or lower volatility, depending on whether credit supply or credit demand shocks predominate. In fact, year-to-year fluctuations in a state’s economic growth fall as its banks become more integrated (via holding companies) with banks in other states. As the bank linkages between any pair of states increase, fluctuations in those two states tend to converge. We conclude that interstate banking has made state business cycles smaller, but more alike. I. INTRODUCTION The United States banking system was once anything but united. Until 1978, every state in the union barred banks from other states, so instead of one national banking system, we had more like 50 little banking systems, one per state. 1 Once states opened their borders to out-of-state banks, bank holding companies marched in and bought up (or merged with) banks all over the country. In 1975, just 10 percent of the bank assets in the typical state were owned by a multistate bank holding company. By 1994 this interstate bank asset ratio had risen to 60 percent (Figure I). Our paper investigates how the advent of interstate banking integration in the United States has affected economic volatility within states. With the United States’ balkanized banking system, the fate of a state and its banks were closely tied; as went the state, so went the banks. The farm price deflation in the early 1980s bankrupted many farmers and many farm banks. Falling oil prices in the mid-1980s wiped out a lot of Texans and a lot of Texas banks. Shocks to commodity prices probably caused these contractions, but frictions in the banking sector may have aggravated them. By allowing a freer flow of bank capital and lending among states, we maintain that interstate banking will reduce the drag that banking frictions can have on economic contractions.