Credit Supply Shocks Research Articles

Expectations, credit conditions, and housing boom-bust: Evidence from SVAR with sign and zero restrictions

Using a SVAR model with sign and zero restrictions, we propose a novel scheme to identify expectation, credit supply and mortgage rate shocks with the aim of exploring their role in the 2000s housing boom-bust cycles. Overall, credit supply and mortgage rate shocks are two major drivers of housing fluctuations instead of expectation shock. However, the relative importance of the three shocks varies considerably over different episodes. Specifically, gradual rise in house prices during 1999-2002 is mainly due to appreciation expectations. Such conclusion is reversed over boom-bust cycles. Compared with less than 10% contribution of expectation shock, credit supply and mortgage rate shocks become the two most important drivers of housing boom, with 20% and 24.5% contribution, respectively. In the bust, 20.2% and 23.1% of decline in house prices are associated with credit supply and mortgage rate shocks, respectively, while only 7.4% can be attributed to expectation shock.

Banking Sector Concentration, Credit Supply Shocks and Aggregate Fluctuations

Banking Sector Concentration, Credit Supply Shocks and Aggregate Fluctuations

The Impact of Credit Supply Shocks in the Euro Area: Market-Based Financing Versus Loans

The Impact of Credit Supply Shocks in the Euro Area: Market-Based Financing Versus Loans

Short-term financing sources in Africa: Substitutes or complements?

Using panel vector autocorrelation models (Panel VaR), we examine the dynamic interrelationships between short-term financing sources for a large sample of 8,464 firm-year observations from seven understudied developing economies over the period 1991-2015. On average, we find that short-term debt and trade credit are complements, while cash holdings are substitutes for short-term debt and trade credit. However, our further analyses show that the interrelationships between short-term financing sources are strong and significant before the financial crisis but diminish thereafter with contractions in credit supply. These changes highlight the impact of credit supply shocks on short-term financing policies of firms domiciled in less-developed capital markets. As firms in Africa, an exemplary less-developed capital market context, rely heavily on short-term financing sources, the dynamic interrelationships we document have important implications that are of interest to academics, practitioners, and policymakers alike.

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.

Bank Lending and Corporate Innovation: Evidence from SFAS 166/167*

ABSTRACTUnderstanding the role of bank lending in corporate innovation is important to policymakers, practitioners, and academics. We provide new evidence on such a role by exploiting the implementation of SFAS 166/167, which removed the off‐balance sheet status of certain securitized assets of banks. The regulation affects bank lending and thus represents a credit supply shock to borrowing firms. We find that affected banks raise spreads and cut loan amounts after the regulation. Firms that borrow from affected banks reduce R&D investment and the number and quality of the patents they generate. The reduction is concentrated among firms whose banks experience more downward pressure on capital ratios and greater market discipline, and firms that are more dependent on external financing. Additional analyses reveal that information asymmetry between incumbent banks and outsiders with respect to borrowing firms prevent them from switching. The overall findings suggest that bank lending promotes borrowing firms' innovation activities. Policies that restrict bank lending are likely to hurt innovation of borrowers.

Credit supply shocks and household consumption in Russia

The paper presents a comparative analysis of the reaction of different consumer groups to the bank credit supply shocks. As parameters of consumer heterogeneity, we consider differences ( i ) in the form of home ownership (households with and without mortgages and tenants) and ( ii ) in the form of credit (households with large debt (mortgages, car loans), households with small (consumer) credit and without loans). For empirical analysis we use RLMS-HSE longitudinal Household Panel Survey for the period from 2006 to 2019, which covers two episodes of the credit crisis and post-crisis recovery. Bank credit supply shocks are estimated using the standard structural vector autoregression (SVAR) model, which also identifies aggregate supply and demand shocks and monetary policy shocks. Our results show that with a positive credit supply shock, which is equivalent to a 0.5 percentage point reduction in the interest rate on loans, households with mortgages increase their consumption by 2.1—2.5% more than households without mortgages. The observed effect is significant, since the average annual growth rate of consumption of households with mortgages in our sample is 3.8%. Our results indicate that the Bank of Russia’s macroprudential policy, which uses countercyclical capital buffers (Basel III) as a tool, can be very effective in smoothing the consumption of households with mortgage debt.

Political risk and financial development in Nigeria: Can credit buy social peace?: Evidence from NARDL approach

This study provides a first attempt to analyze the role of credit in the political stability of developing countries. By examining the case of Nigeria using annual data over the period 1984–2017 and the non-linear ARDL (NARDL) approach, we find that credit supply shocks have a significant and non-linear impact on short- and long-term political risk. In terms of asymmetry, we show that positive shocks have a positive and more pronounced impact than negative shocks in the short run, proving that credit expansion can be effective in terms of short-term political stability. In the long run, positive credit shocks increase political risk while negative shocks decrease it. These results suggest that an improvement in Nigeria’s prudential requirements for credit supply could be more effective for political stability than an easing of credit in the long run. In addition, better management of oil revenues, particularly through effective sterilization policies, is essential to prevent oil price fluctuations from leading to a highly pro-cyclical supply of credit, which threatens long-term political stability.

The Role of Marketplace Lending in Credit Markets: Evidence from Bank Mergers

We develop a model of competition between banks and a marketplace lender to motivate empirical tests using local market data on U.S. banks and the largest marketplace lending platform. Employing mergers of large, multimarket banks as an exogenous credit supply shock, we find that marketplace lending absorbs unmet demand for consumer credit following a decline in the availability of bank credit. Merger-induced bank branch closings lead to an increase in marketplace loan requests and loan acceptance rates, particularly for debt consolidation loans to lower-risk consumers. We also find that marketplace lending mitigates credit distress in local economies affected by mergers. This paper was accepted by Tomasz Piskorski, finance.

Un-used Bank Capital Buffers and Credit Supply Shocks at SMEs during the Pandemic

<ns2:p>Did banks curb lending to creditworthy small and mid-sized enterprises (SME) during the COVID-19 pandemic? Sitting on top of minimum capital requirements, regulatory capital buffers introduced after the 2008 global financial crisis (GFC) are costly regions of "rainy day" equity capital designed to absorb losses and provide lending capacity in a downturn. Using a novel set of confidential loan level data that includes private SME firms, we show that "buffer-constrained" banks (those entering the pandemic with capital ratios close to this regulatory buffer region) reduced loan commitments to SME firms by an average of 1.4 percent more (quarterly) and were 4 percent more likely to end pre-existing lending relationships during the pandemic as compared to "buffer-unconstrained" banks (those entering the pandemic with capital ratios far from the regulatory capital buffer region). We further find heterogenous effects across firms, as buffer-constrained banks disproportionately curtailed credit to three types of borrowers: (1) private, bank-dependent SME firms, (2) firms whose lending relationships were relatively young, and (3) firms whose pre-pandemic credit lines contractually matured at the start of the pandemic (and thus were up for renegotiation). While the post-2008 period saw the rise of banking system capital to historically high levels, these capital buffers went effectively unused during the pandemic. To the best of our knowledge, our study is the first to: (1) empirically test the usability of these Basel III regulatory buffers in a downturn, and (2) contribute a bank capital-based transmission channel to the literature studying how the pandemic transmitted shocks to SME firms.</ns2:p>

Uncovering the Dynamic Relationship between Credit and Sustainable Economic Growth in Selected CEE Countries

Establishing a functional financial sector has been one of the pillars of transition to a functional market economy over the last three decades in the CEE region. The present paper provides a comprehensive analysis of the relationship between credit and economic growth in selected CEE countries, namely, Czechia, Romania, Poland and Hungary, aiming to answer questions related to (i) the role of the banking sector in fostering sustainable economic growth and the causality direction between the financial and real sector, (ii) the relationship between consumption and investment and certain categories of loans and (iii) the identification of loan supply shocks and their role in explaining the dynamics associated with other macroeconomic variables. Using a time-varying parameter structural vector autoregression model with stochastic volatility (TVP-SVAR) and sign restrictions, we identify a non-financial corporations (NFC) credit supply shock and an investment shock. Potential policy solutions to ensure a sound contribution of the financial sector to economic growth in the analyzed economies relate to the strong relationship identified between the two variables. From this perspective, the study is among the first to employ a robust dynamic framework for assessing the role of the financial sector in fostering sustainable economic growth in European emerging market economies.

Housing Booms and Bank Growth

The rapid increase in U.S. house prices during the 2001--2006 period was accompanied by a historically rapid expansion of bank assets. We exploit cross-regional variation in local housing booms to study how housing demand shocks affected the growth of the banking sector. We estimate the effect of housing demand shocks that are orthogonal to local non-housing demand shocks and a range of observed local credit supply shocks. We employ several instrumental variables that plausibly identify variation in local housing demand that is exogenous to local banks. We find that the housing boom had a large effect on bank asset growth---the cross-regional elasticity of bank growth with respect to housing demand shocks is around 0.6. The regional elasticity estimate suggests that in aggregate, non-credit-supply-induced housing demand shocks can potentially account for more than a third of the growth of the banking sector during this period.

Global corporate debt during crises: Implications of switching borrowing across markets

This paper shows how crises prompted firms to switch borrowing across debt markets, impacting the amount borrowed, maturity, and currency denomination at the firm and aggregate levels. During financial crises, firms from advanced and emerging economies shifted their issuance activity between domestic and international syndicated loans and corporate bonds. Firms increased their borrowing in markets not directly hit by crises, partly compensating for declines in shock-hit markets, which provides evidence of market-specific credit supply shocks. As firms moved away from the markets in crisis and borrowed elsewhere, they maintained their borrowing maturity and changed their currency denomination. Changes occurred not only within firms, but also in the composition of issuing firms. The number of borrowing firms declined in crisis-hit markets and increased elsewhere. Mostly large firms issued during crises and switched markets. Overall, the debt dynamics obtained from studying jointly different debt markets differ from those observed in individual markets.

Credit Supply Shocks and Household Defaults

Are disruptions of the mortgage market a consequence of financial imbalances accumulated in the past? In this paper, we study the effects of positive and negative credit supply (CS) shocks on subsequent household defaults on debt over the last four decades in U.S. states. We apply sign restrictions within a VAR framework to isolate state-level CS shocks, and identify that 1984 and 2004 were the years of systemic, countrywide, positive CS shocks whereas 1989 and 2009 brought systemic negative shocks. Further, by employing a difference-in-differences framework, we find that both positive and negative CS shocks lead to greater household defaults in the future if they also increase mortgage-to-income ratios. We show that the CS shock-induced (i) shifts of employment between the tradable and non-tradable sectors, (ii) changes in household income and (iii) in house prices facilitate the accumulation of default risks. Our results indicate that positive CS shocks occurred in 1984 did not raise household defaults by more in more exposed states compared to less exposed states because the shocks increased both future income and mortgage debt, while not affecting mortgage-to-income ratios. In contrast, the 1989, 2004 and 2009 CS shocks increased mortgage-to-income ratios in subsequent years, thereby raising debt delinquencies and household defaults. These results provide further empirical evidence to theories of endogenous credit cycles.

Credit Supply and Demand in Unconventional Times

AbstractDo borrowers demand less credit from banks with weak balance sheets, following monetary policy shocks? To answer this, we use novel bank‐specific survey data matched with balance sheet information for euro area banks. We find that, following a monetary policy shock, bank strength influences credit demand as well as credit supply. Bank resilience is important for firms when selecting a lender and it is therefore vital to control for bank‐specific demand when identifying credit supply shocks. An application using bank‐specific demand shows that—even after fully controlling for demand, borrower quality, and bank strength—unconventional monetary policies stimulate loan supply.

The effect of credit shocks in the context of labor market frictions

The recent financial crisis was associated with a large and prolonged deterioration of the credit supply. I build and calibrate a structural model to explore the impact of credit-supply shocks on firm behavior in the context of labor market frictions. I discover that (i) a negative shock to the credit supply can lead to a protracted depression in business activities when firms have a steady level of productivity (demand) and that (ii) a reduction of labor adjustment costs can improve investment and mitigate the negative impact of credit-supply shocks, especially for firms with a high level of productivity. I also empirically corroborate that a lower labor unionization rate can mitigate the negative impact of supply shocks on high-demand firms during a crisis.

Firing restrictions and economic resilience: Protect and survive?

Firing restrictions are in use throughout the developed world but their role in the transmission of macroeconomic shocks into the real economy is mostly unstudied. We illustrate the theoretical role of these policies as amplifiers of macroeconomic shocks via labor-misallocation-induced output losses following an adverse shock. We use our model to derive an aggregation result which features a labor misallocation term and conduct a simulation exercise which demonstrates how misallocation can drive total factor productivity (TFP) down during recessions. We then perform a quasi-natural experiment which utilizes global credit supply shocks to study this amplifying role using a panel of 21 OECD economies. We show that strict firing restrictions are associated with a weaker initial response of the labor market, which is followed by a stronger and more persistent decline in real output as well as a slower return of real activity to pre-shock levels. The stronger output decline can be mostly explained by a stronger fall in aggregate TFP, which supports our theoretical predictions.

Do Credit Supply Shocks Affect Fertility Choices?

We empirically investigate the role of credit supply in fertility decisions. Using the U.S. banking deregulation in the 1980s and the 2007–2009 Great Recession as two different laboratories for credit supply shocks, we find that an increase in credit supply consistently implies higher fertility rates, as well as higher probability of giving birth. This relation, which is economically and statistically significant, differs across individuals: it is more pronounced for young women and for families with unemployed husbands. Finally, we provide suggestive evidence that increased credit access leads to more optimistic expectations about personal prospects, and in turn, higher fertility rates.

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.

Sovereign Risk, Credit Shocks and R&D

We study how private R&D investment in France was affected by the tightening of credit conditions during the European Sovereign Debt Crisis. Using detailed R&D information on more than 25000 French companies, we show that financially constrained firms were relatively more likely to scale back their R&D activities following the sovereign debt crisis. We then focus on bank-firm linkages and exploit variation in the sovereign risk exposure of firms’ main bank during the sovereign debt crisis as an exogenous credit supply shock. Results indicate that firms related to banks with larger exposures to risky sovereign debt decreased R&D expenditure by more relative to other firms following the crisis. Our findings indicate that credit supply shocks have significant impact on firms’ R&D activities, and highlight an important transmission channel of sovereign risk to firm innovation and productivity.