Credit Supply Research Articles

Identifying the transmission channels of credit supply shocks to household debt: Price and non-price effects

Using UK matched microdata, I show that credit supply shocks affect mortgage debt via two channels: one that operates through price conditions in credit markets; and another that operates through non-price credit conditions and affects the quantity of credit supplied by lenders. I find substantial heterogeneity in the different channels by household characteristics. Lower-income households and first-time buyers are especially sensitive to changes in the supply of riskier lending. Home-owners, higher-income households and older borrowers increase debt following shocks to either type of credit conditions, with loosening in mortgage spreads, maximum LTI limits and loan approvals being strongly correlated with their borrowing levels. In aggregate, household leverage responds more strongly to supply shocks that change the quantity of credit, as they affect households across the distribution, both at the intensive and at the extensive margin. But a loosening in price and non-price credit conditions simultaneously or a contraction in multiple price indicators at a time can also fuel rapid credit growth.

Anti-corruption, credit supply, and agricultural economic development

This study analyzes regional panel data from China (2013–2019) to explore how the government's anti-corruption efforts and credit supply affect agricultural economic development. The empirical results show that anti-corruption and credit supply can effectively enhance agricultural economic development, and there is a complementary relationship between anti-corruption and credit supply, meaning that anti-corruption measures and credit supply can jointly promote the development of the agricultural economy. Further analysis indicates that the complementary and synergistic effect of the two on agricultural economic development is more pronounced in sample groups with a lower degree of marketization.

Fintech's influence on green credit provision: Empirical evidence from China’s listed banking sector

We explore the impact of financial technology (fintech) advancements on green credit provision, investigating publicly traded banks in China from 2007 to 2022. We particularly focus on credit modelling innovation, examining the non-linear dynamics between fintech evolution and green credit distribution. Results reveal a positive U-shaped correlation. Initial stages of fintech are associated with increased green credit risk, negatively affecting the volume of green credit. However, more established fintech infrastructures significantly enhance green credit volumes by improving resource allocation and credit risk assessment. Utilizing a multiple linear regression approach, we highlight the transformative nature of fintech in advancing sustainable banking practices, particularly through innovations in credit modeling that enhance green credit risk management and resource allocation efficiency.

Bank Specialization and Zombie Lending

We study whether banks internalize congestion externalities when lending to zombie firms. We conjecture that banks should be better informed about the presence of zombie firms and the congestion externalities that such firms exert on healthy borrowers in industries where banks are specialized and show that banks’ credit supply to zombie firms relates negatively to their industry specialization. This relation is stronger when congestion externalities are likely to have stronger adverse effects, namely when zombie firms take a higher fraction of resources in the industry or when the industry is geographically more concentrated. Additionally, this relation is weaker in industries with higher asset specificity as zombie firms’ default (and potential asset fire sales) could reduce healthy borrowers’ collateral value. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2023.01437 .

Cross-sectional financial conditions, business cycles and the lending channel

I document business cycle properties of the cross-sectional distributions of U.S. stock returns and credit spreads. The skewness of returns of financial firms (SRF) best predicts economic activity, while being a barometer for the lending channel—credit supply shifts beyond what is explained by borrowers’ conditions. SRF also predict firm-level investment beyond firms’ balance sheets. Using a structural model, I estimate that while SRF is highly cyclical, shocks to the cross-sectional skewness of financial firms’ asset quality help explain GDP growth in historical episodes. These results point to the cross-section of financial firms playing a prominent role in business cycles.

R&D investments under financing constraints

ABSTRACT We analyse the effect of credit supply constraints on R&D conditional on the financial strength of firms and heterogeneity in the restrictions in the supply of external financing. The financial strength of firms and access to external financing are identified by an exogenously calculated rating index. Restrictions in the supply of external financing are determined by the specific time period (crisis vs. non-crisis) and the balance sheet strength of the firm’s main bank in terms of bank capital. Our results support the theoretical prediction that financing constraints negatively affect R&D. We find that firms with a lower financial strength reduce R&D to a stronger extent in times of stress on financial markets and when the firm faces restrictions in external financing. Additionally, the effect does not persist over time.

Time-varying Persistence of House Price Growth: The Role of Expectations and Credit Supply

Time-varying Persistence of House Price Growth: The Role of Expectations and Credit Supply

Measuring Bank Credit Supply Shocks Using the Senior Loan Officer Survey

Estimating the effects that bank credit supply has on macroeconomic activity has long been an area of active research. A key challenge in pursuing this goal is the ability to measure such shocks to banks' supply of credit separately from shocks to borrowers' demand for credit.

Unpacking the Effects of Bank Credit Supply Shocks on Economic Activity

In this note, we examine the effects of bank credit supply shocks on real economic activity. First, we estimate how GDP and various aggregate demand sectors respond to such shocks. Second, based on the estimated responses, we compute how much those sectors contribute to the overall response of aggregate demand to bank credit supply shocks.

PENERAPAN PRINSIP PRUDENTIAL BANKING PADA PEMBIAYAAN KREDIT USAHA RAKYAT MIKRO: STUDI PADA BANK SYARIAH INDONESIA CABANG BANDA ACEH

Kredit Usaha Rakyat (KUR) is a credit facility to middle to lower class customers that issued by banking industries in Indonesia, which focusses on aspects of livestock, trade, and agriculture. PT Bank Syariah Indonesia, Banda Aceh is one of bank company which issues this product and always applies prudent banking principles, especially in financing. The application of the prudential principle is carried out starting from the beginning of the debtor applying for credit analysis of KUR financing until the financing is paid off. This type of research is a qualitative descriptive approach through case studies. The result finds that the application of prudential banking principles applied to the company can be seen from the various provisions set by Bank Indonesia. The provisions of the prudential principle are the Capital Adequacy Ratio (CAR), namely the maximum credit provision (Maximum Lending Limit), the allowance for productive asset liabilities, and the provisions that regulate banking itself. The company can be seen from non-performing loans, it seems that their non-performing loans originated from year to year are increasing even though they have implemented the prudential principle, but there are still non-performing loans.

Supply and demand behaviors in the Chinese emission allowances pledge credit market under different value type: An evolutionary game analysis

Chinese Emission Allowances (CEAs) pledge credit provides a new way for banks to reduce green credit risks and for low-carbon enterprises to improve the credit availability. However, insufficient supply and demand is the main dilemma of CEAs pledge credit in China. One of the reasons for this dilemma may be the neglect of the forward value of CEAs in value assessment. This research explores the decision-making behavior of the supply and demand subjects in the CEAs pledge credit market under different value types of CEAs. First, the improved B–S options pricing model with consideration of transaction costs is used in the construction of the payoff matrix to measure the option value of CEAs. The new matrix aims to place both the option value (corresponding to forward value) and the market value (corresponding to spot value) in the CEAs pledge value evaluation framework. Then, based on the new matrix, an evolutionary game model between key emission enterprises (KEEs) and commercial banks (CBs) is built to dynamically analyze the equilibrium state of supply and demand as well as the strategic interaction of participants in CEAs pledge credit market. Finally, numerical simulations demonstrate the driving factors of supply and demand for CEAs pledge credit. The research results show that compared to market value, the option value of CEAs is more conducive to stimulating the supply and demand of CEA pledge credit; and the shorter the remaining valid period of CEAs, the higher the participation enthusiasm of supply and demand parties. Furthermore, reducing low-carbon technology risks and increasing the carbon emissions trading prices at the end of pledge period can significantly improve the supply and demand of CEAs pledge credit, but the loan and deposit interest rates of CEAs pledge credit are ineffective.

Financial development and population growth: Evidence from bank concentration in China

Using 288 cities in China from 2000 to 2018, we show that a one-standard-deviation increase in bank concentration is associated with 7.9% lower population growth relative to the mean. This effect holds robust after controlling for city characteristics. Cities with higher bank concentration have less entrepreneurship and labor income. We use China's 2009 bank deregulation as a quasi-natural experiment, and find that the shock leads to significant increases in population growth for cities with new entry of joint-stock banks and city commercial banks. We argue the deregulation increases credit supply, which relieves local households' financial constraints and improves population growth.

Curse and blessing: The effect of the dividend ban on euro area bank valuations and syndicated lending

At the outbreak of the Covid-19 pandemic, the European Central Bank issued a strong recommendation towards banks to halt dividend payouts. The goal of this de facto dividend ban was to boost banks' capital to ensure the supply of credit. However, given the importance of dividends for investors, this unprecedented measure is likely to have impacted bank valuations. Hence, banks may have chosen to preserve their higher capital buffers to boost payouts after the lifting of the ban, rendering the intended positive effect on credit supply a priori uncertain. We first investigate the effect of the dividend ban announcement on euro area banks' valuations and find a significantly negative impact. Second, we show that banks significantly expanded credit supply in the syndicated loan market, without counteracting effect of the negative stock market reaction. Our findings are corroborated when we exploit the multi-bank nature of syndicated loans in a within-loan setup.

Factors influencing demand for, and supply of, agricultural credit: A study from Bangladesh

The provision of a wide range of financing choices enhances farmers' ability to respond to changing circumstances in their agricultural activities and maintain optimal levels of production. However, several household- and farm-level determinants impact the availability of, and demand for, agricultural credit in rural households. Therefore, the current study explores the determinants of demand for, and supply of, agricultural credit. To do so, data at the farm level were gathered using interviews with a randomly selected sample of 360 respondents in the Mymensingh region of Bangladesh. Additionally, 30 years' worth of secondary data were obtained from various sources to investigate the determinants of agricultural credit supply. Data were analyzed using binary logistics and multiple linear regression. Findings reveal that farmers’ demand for agricultural credit is positively influenced by farming experience and farm size. Factors that significanly discourage farmers from taking credit include (a) an increase in income-generating family members, (b) perceived high interest rates of credit, and (c) negative perceptions regarding the application procedure. Factors that increase agricultural credit supply are (a) an increase in credit supply targets and (b) increased severity of natural disasters. In addition, an increase in non-performing loans does not hinder agricultural credit supply as the Bangladeshi government has placed special emphasis on protecting farmers from crop failures and other adverse situations in order to achieve food self-sufficiency in the country.

Government environmental attention, credit supply and firms' green investment

This study employs textual analysis to construct a dataset reflecting the level of environmental attention by local governments and utilizes data from Chinese A-share listed companies between 2003 and 2020 as a sample to investigate the impact of local government's environmental attention on firms' green investment. The findings demonstrate that local government's environmental attention positively influences companies' green investment. Mechanism analyses reveal that local government's environmental attention primarily stimulates enterprise green investment by expanding the scale of green credit supply and reinforcing local environmental regulations. The effect of local government's environmental attention is more pronounced for state-owned enterprises, heavily polluting firms, large-scale firms, and firms with higher cash reserves and low financing constraint. Moreover, the influence is particularly significant in eastern China as well as regions characterized by lower ecological levels and stronger enforcement of environmental regulations.

The policy gap between finance and economy: Evidence from China's green finance policy

By exploiting the quasi-natural experiment of China's pilot zone for green finance reform and innovation (PZGFRI) policy, this paper investigates how the green finance policy affects corporate total factor productivity (TFP). The multi-period difference-in-differences method shows that the policy significantly reduces enterprise TFP. Moreover, this study finds that the policy promotes the control of credit by local governments but worsens credit supply to firms and then reduces TFP. This study further adopts moderation effect estimates to show that the intensity of financial regulation mitigates the negative impact of the policy on TFP. Ultimately, we warn that a green finance policy in a developing country cannot inherently guarantee economic performance. In addition, financial regulation is critical to lessening the problem of economic inefficiency due to the green finance policy.

Unravelling the credit market shocks and investment dynamics: A theoretical and empirical perspective

This paper investigates the underlying credit market shocks that historically affected business investment in the Slovenian economy. In contrast to the existing literature, we explore more profound structural shocks beneath the credit demand and supply shocks. For the purpose of structural identification, we propose a theoretical model of the credit market that reveals the credit market imperfections on the side of credit supply as well as liquidity demand. The theoretical structure justifies our set of identifying restrictions, further evaluated with the structural Bayesian VAR model. Our results confirm the relevance of loan supply shocks for the business investment activity, suggesting the existence of credit market imperfections. Furthermore, business investment is strongly conditioned by liquidity demand shocks, which explain a significant part of the variation in investment activity. Even though loan supply shocks constrained the investment activity in Slovenia during the financial crisis, the results of our analysis suggest that banks predominantly reacted to the increasing financial risk as opposed to the changes in their profit functions. Based on the results, we may conclude that in the common monetary area, fiscal policy should implement country-specific measures to effectively address the business sector's expectations regarding the economy's medium- and long-term development.

The London money market and non-British bank lending during the first globalisation: evidence from Brazil

AbstractThis study examines the relationship between the London money market (LMM) and the credit provision of non-British overseas banks in peripheral economies during the first wave of globalisation. Using monthly data between 1889 and 1913, we find a positive relationship between the amount of credit authorised by the German Brasilianische Bank für Deutschland in Brazil and the spread between the London market and floating rate. Our results suggest that increased demand for foreign bills and/or decreased borrowing costs in the LMM leads to an increase in credit supply. We use the impact of annual tax payments on the spread between the market and floating rate as an instrumental variable (IV) to show that this relationship is causal. Although there is a significant amount of literature on London’s historic role as a global financial centre and a growing number of studies on foreign banking history, little quantitative evidence is available about the connection between the two. This study bridges this gap.

FinTech and banks: Strategic partnerships that circumvent state usury laws

This paper investigates the role of interest rate regulation of consumer credit and institutional risk segmentation in FinTech lenders’ efforts to solicit new customers in the personal loan market. We find that strategic partnerships between FinTech companies and specialist banks target marginal-risk, near-prime and low-prime consumers, living in states with low interest rate ceilings for unsecured personal loans. In partnering with the specialist banks, the FinTech lenders are able to take advantage of federal preemptions from state rate ceilings to lend profitably to higher-risk consumers in states with low rate ceilings to compete in these markets. We also show that when these partnerships are restricted, finance companies increase their credit supply.

Climate policy uncertainty and bank liquidity creation

This paper examines the influence of Climate Policy Uncertainty (CPU) on the liquidity creation of banks in China. Through an empirical analysis of data from 387 commercial banks in China, our findings indicate that CPU notably diminishes bank liquidity creation. The effect is predominantly observed on the asset side of liquidity, indicating a reduction in credit supply by banks as a response to increased CPU, while the impact on liability side liquidity appears negligible. The study further uncovers significant regional variations in the vulnerability of banks to CPU, highlighting that foreign banks, eastern and middle banks are disproportionately affected.