Demand For Bank Loans Research Articles

The Causal Relationship between Bank Loans and Bank Capital

Demographic variation in the loan demand is used to identify a causal relationship between bank loans and bank capital. Middle-aged people tend to have a higher demand for bank loans compared to other age groups. Banks that are active in regions with more middle-aged residents have higher amounts of loans. This generates a geographically varying demand for bank loans. Using this variation as an instrument, we show that banks with more loans hold relatively lower bank capital ratios. This negative relationship is stronger during crisis periods.

Investigating the Demand of Small Hotel and Restaurant Businesses for Bank Financing: The Case of Turkey

The literature argues that small businesses are highly dependent on bank financing due to their inability to access the capital markets. We paint a different picture in this paper that analyzes the demand of small hotel and restaurant businesses for bank financing in Turkey. The results of a countrywide survey done with the owners/managers of the businesses that were responsible for the financial affairs are used for the analysis. We find that the majority of the businesses in the sample did not make a loan application in the last three years. Moreover, the tendency of firms to apply for bank financing did not change with age. When asked whether their firm were in a position not to apply for a bank loan in the last three years even if they needed bank financing with the idea that the application would be rejected, nearly all the participants responded negatively. The majority of the owners/managers of the firms declared that their firm’s demand for bank loans would increase with lower interest rates and lower collateral requirements. On the other hand, firms that would have a higher demand for bank loans if there were a reduction in interest rates and collateral requirements were younger firms.

The Euro Area Bank Lending Survey

The euro area bank lending survey (BLS) serves as an important tool in the analysis of bank lending conditions in the euro area and across euro area countries, providing otherwise unobservable qualitative information on bank loan demand and supply from/to euro area enterprises and households. Since its introduction in 2003, the BLS has received growing attention and has become of key importance for the analysis and assessment of bank lending conditions in the euro area and at the national level. In particular in the context of the financial crisis, the BLS was used to gather additional information on the impact of the crisis and of the ECB JEL Classification: E44, E5, G21

Credit rationing for Portuguese SMEs

This study examines the importance of credit demand and credit supply-related factors in explaining the evolution of credit granted to Portuguese SMEs. The results suggest that the interest rate is a strong driver of SMEs’ demand for bank loans, as well as their internal financing capacity. On the other hand, credit supply mostly depends on the firms’ ability to generate cash-flows and reimburse their debt, and on the amount of collateral. The model was estimated for the period between 2010 and 2012. The results suggest that a considerable fraction of Portuguese SMEs were affected by credit rationing in this period.

Does Bank Supervision Impact Bank Loan Growth?

We estimate the impact on individual bank loan growth caused by supervisory restrictions associated with a poor bank examination rating. We use a novel approach to control for bank loan demand variation and estimate a fixed-effect model using an unbalanced panel with over 443,000 bank-quarter observations from the period 1994-2011. Our estimates show that supervisory restrictions have a large negative impact on bank loan growth after controlling for the impact of monetary policy, bank capital and liquidity conditions and any voluntary reduction in lending triggered by weak legacy loan portfolio performance or other bank losses.

Keynes and the endogeneity of money

A common feature of practically all strands of post-Keynesian theory is the notion that the money supply should not be considered as fixed independently of money demand in macroeconomic models. There are, however, at least two ways to postulate money endogeneity. The first, and perhaps best known today, is Kaldor's version, where the money supply curve is assumed to be horizontal at a given interest rate level. Kaldor's approach focuses on the means-of-payment function of money, stating that money is created when firms and individuals plan to acquire goods and services and borrow from banks the necessary amount of money to do it. Kaldor's emphasis is laid on central banks' behavior, assumed to be entirely accommodating of commercial banks' demands for the reserves required to satisfy the demand for bank loans. Keynes's version, based on his Treatise on Money and other essays, focuses on money in its liquid-store-of-wealth function. To propose that money is the most liquid asset in an entrepreneurial economy rules out the possibility of accepting a horizontal money supply curve, as it is shown in the paper. In fact, the first and most important contrasting concept in Keynes's approach in comparison to Kaldor's is the notion of liquidity. Keynes proposes a hierarchical view of liquidity, while Kaldor views liquidity as a ‘flat’ concept, where different assets exhibit different degrees of liquidity but their relationship is not hierarchical. A second contrast is that Keynes's view of endogeneity is based on a theory of how banks work instead of a theory of central banking. The paper develops Keynes's approach to money endogeneity along the lines just described and evaluates Kaldor's criticisms of Keynes's views.

Money and Output - The Missing Links: A Time Series Analysis

There is an immense body of literature on the relationship of money and output, with result-integrity depending on the aggregates used. This paper proposes an alternative two-step approach, based on the reality that: (1) money creation is just the outcome of new bank loans extended, and (2) the (net) new demand for bank loans, when satisfied by the banking sector, parallels the growth in nominal GDP in the long-term – because, mainly, economic units borrow to consume (C) or invest (I), the major contributors to nominal GDP. The new deposits created are M1 deposits, but they can swiftly shift to M2-M1 or M3-M2, reflecting portfolio – or “demand for money” – decisions. Therefore, mining for an association between M1 and real GDP growth is not fruitful. The direct link between the monetary and real sectors lies is the association of new net bank loans to the private sector (the outcome of which is money creation) with nominal GDP growth: the R2 of the South African data (no massaging; quarterly; 1965-2012) is 0.99. The relationship in the short-term is less well correlated. The long- and short-term associations must be a fully considered Step 1, because it contains the seeds of the answer to Step 2: the translation of nominal GDP growth into real GDP growth and inflation, that is, the trade-off between these related aggregates. This article offers a time series analysis of Step 1, based on South African data.

Money Creation: Role of Bank Liquidity

The state of bank liquidity, measured as the banks' net excess reserves (NER) with the central bank, is a critical element of the successful implementation of monetary policy. Central banks have absolute control over NER and manipulate it to bring about a positive NER (in QE periods) to drive interest rates down, or a negative NER in order to have control over interest rates. The latter condition aims at influencing the exogenous force, the demand for bank loans. Satisfaction of the demand for bank loans has the simultaneous outcome of deposit money creation.

Money Creation: Death of the Money Multiplier

It persists in part of the literature that there are two monetary policy models: the monetary base-focused model (aka the money multiplier model/strict money-rule model) and the interest rate-focused model. The former only exists in theory because its implementation (for brief periods in a few countries) had severe consequences in terms of interest rate volatility (a major input in business decision-making). The interest rate-focused model relies on interest rates, which are under the control of the central bank, being the restraining factor in the demand for bank loans which, when satisfied by the banks, leads to simultaneous deposit (money) creation. It is still alleged by some that the two models differ in terms of how money is created. This is not so, as money creation is the outcome of net new bank lending in both (only endogenous money creation exists). The difference between the two models is that the one is applied while the other is not. It is time to say goodbye to the money multiplier.

An empirical comparison of credit channel in emerging markets: evidence from five Asian economies

This paper examines the existence of credit channel in five Asian economies namely Malaysia, Indonesia, Thailand, Philippines and Korea. We estimate a variant of bank loan demand and supply model using a structural vector error correction (SVEC) model to deal with fundamental issue of identification problems. The empirical findings of the bank lending channel from these countries suggest that bank loans decline following the monetary contraction, consistent with the credit channel view. However, it is not clear whether the credit supply is really the binding constraint using the aggregate data, in the event that both credit supply and demand felt simultaneously following monetary policy shock. The results from the aggregate data cannot fully explain the monetary transmission via credit channel. Hence, employing firm–level data approach may shed further insights on the credit channel transmission mechanism.

Money Creation: Misconceptions: It Begins with a New Deposit

Founded on the money multiplier, the imminent demise of which is not overstated, there exists a profound misconception: that money creation begins with a new deposit. In many cases the source of the new deposit is not specified, and somehow the recipient bank acquires reserves. In other cases the source is specified: cash (ie bank notes and/or coins), which does provide reserves, but the subsequent process is mistreated. The worst offence is to base one of the most significant issues in economics on a supply of bank notes and coins (which is limited because it is a noninterest-bearing asset, and which makes up 2-5% of M3). The analyses presented are partly correct: that new bank loans concurrently create new deposits (money), but the starting point is disingenuous. They also obscure the significant reservesaccommodating role of the central bank as well as the role of its policy interest rate in monetary policy, the essence of which is influencing the demand for bank loans through bank lending rates.

Money Creation: Reflections of an Ex-Central Banker on Exogenous/Endogenous Money

Exogenous money creation does not exist, but did under a past specie-money system. Central bank control of bank reserves and therefore control of bank deposit (money) creation via the money multiplier can exist, but this has nothing to do with the process of money creation. Rather, it is a style or model of monetary management, a style no longer in fashion because of its severe interest rate consequences. New bank deposits (money), also under a reserves-multiplier model, can only be created endogenously - beginning with the existence of a demand for bank loans which, when satisfied by the banks, leads to the simultaneous creation of bank deposits.It is heartening that the 'home' of the Monetarist School model of money creation (based on the multiplier), the US, is showing distinct signs of recognition of the source of money creation being as described here. Bank reserve quantity changes are an outcome of deposit quantity changes (money creation) and not the driver thereof. Reserve requirement changes are just one of many sources of changes in bank liquidity, which are happily accommodated by the central bank at the policy/key interest rate, to make it effective.

Bank Lending to the Production Sector: Credit Crunch or Extra - Credit?

This paper provides empirical evidence to support the theory that, in Italy, over the course of the past two years, even though a considerable slowdown in bank lending has been recorded, there has not been a credit crunch. After a first section dedicated to a descriptive analysis of the data, the paper presents an econometric estimation of the production sector’s demand for bank loans. An Error Correction Model (ECM) is used – estimated for the pre-crisis period (1998.Q2 – 2007.Q2) and applied both with the one and two step procedure – which considers lending as a function of the added value of the private sector, of the gross operating margin to nominal added value ratio (a proxy for self-financing) and of the real interest rate applied to loans. To test the robustness of the results obtained in the first specification of the model, we remove the assumption of weak exogeneity of the independent variables of the single equation model and construct a multivariate multi-equation model (VECM). All of the different approaches and methods adopted provided similar results: as expected, the demand for credit increases as real added value increases and decreases as the cost of lending and self-financing increase. The dynamic out-of-sample forecast of the model, relating to the two-year period of economic and financial crisis (2007.Q3 – 2009.Q2), shows that the actual loan stock remained well above the “theoretical” level forecasted on the basis of the functional relationships estimated before the crisis. This delta (which can be defined as “extra-credit”) is interpreted as the outcome of a rightward shift of the credit supply curve, rather than a leftward shift as would have happened in a credit crunch scenario.

The liquidity trap: Japan, 1996–2001 versus the United States, 1933–1940

Keynes’ “liquidity trap” rarely occurs. But when it does, it has a tremendously adverse effect on the economy concerned. Such was the case of the United States in the 1930s and now that of contemporary Japan. In a liquidity trap, monetary policy pushes the money interest rate to the zero level while expanding the money supply ( M1) at a faster rate than nominal GDP. Conventional theory explains this phenomenon as the result of money demand that becomes infinitely interest-elastic at the zero rate, rendering ineffective the rapidly expanding money supply established by the monetary authorities. In this paper, we show that the liquidity trap is a multifaceted phenomenon not limited to the money market. It involves the bank loan market, the bank deposit market, and the bond market interacting together. Of these, the most important is the bank loan market and the least important is the bank deposit market, whose deposit supply becomes horizontal at the zero rate. They are met by relatively interest-inelastic bank loan demand and bank deposit demand. Hence, the causality is completely reversed from the conventional understanding. We give empirical evidence in support of our theory based on data from the United States, 1933–1940 and Japan, 1996–2001. Far apart in time and space, the two cases are remarkably alike and, hence, provide strong supporting evidence.

Impacts of the BIS regulation on the Japanese economy

The Japanese economy in the 1990s is a typical example of “pro-cyclical effect” of the BIS regulation. The regulatory authority tried to mitigate its negative impacts by enlarging the definition of Tier II category of the bank capital. Finally, the authority bailed out all major banks by providing the public money to maintain the BIS capital ratio. This unprecedented difficulty of the banking system to supply credit gave negative impacts to the future prospects of the economy, which resulted in the reduced demand for bank loans. It contributed to a reduction of the money supply, leading to the prolonged deflation and recession. It took a long time to recover the public confidence in the banking system. Due to the enlarged definition of the BIS capital, the BIS capital ratio of Japanese banks were consistently cleared the 8% level. On the contrary, the market-valued capital ratio, which is theoretically more straightforward than the BIS capital ratio, sensitively reflects the bank's soundness responding to the bad loan ratio and the ROA. The market-valued capital ratio is the more accurate measure of the bank soundness even for the regulatory purposes.

Evidence on the Response of US Banks to Changes in Capital Requirements

This paper develops a structural, dynamic model of a banking firm to analyze how banks adjust their loan portfolios over time. In the model, banks experience capital shocks, face uncertain future loan demand, and incur costs based on their proximity to regulatory minimum capital requirements. Non-linear relationships between bank capital levels and lending are derived from the model, and key parameters are estimated using panel data on large US commercial banks operating continuously between December 1989 and December 1997. Using the estimated model, the optimal bank response to changes in capital requirements, shocks to bank capital, and changes to bank loan demand is simulated. The simulations predict that increases in risk-based and leverage capital requirements, negative capital shocks, or a decline in loan demand cause a reduction in loan growth. Nevertheless, by calculating the optimal portfolio response to these various changes, it is shown that changes in capital regulation are a necessary ingredient to explain the decline in loan growth and the rise in bank capital ratios witnessed nearly a decade ago. Thus, this study suggests that the current effort to redesign bank capital requirements should work under the assumption that banks will optimally respond to the economic incentives found in the regulation.

Demand for Bank Loans and Investment under Borrowing Constraints: A Panel Study of Japanese Firm Data

We estimate a corporate demand model for bank loans on the basis of panel data set of Japanese corporations. What is novel is an explicit treatment of borrowing constraints in the estimation, which is formulated as a function of the land asset of the firms. The model is estimated by employing the econometric technique used for analyzing the disequilibrium model. The virtue of our approach is to separate firms into constrained and unconstrained groups endogenously. We find that land plays a significant role as collateral in mitigating the borrowing constraints. We also compare the investment behavior between the constrained firms and the unconstrained firms. Cash flow as well as land plays a far more vital role in the investment decision for the borrowing-constrained firms. J. Japan. Int. Econ., March 2000, 14(1), pp. 1–21. Institute of Social and Economic Research, Osaka University, 6-1 Mihogaoka, Ibaraki 567-0047, Japan; Department of Commerce, Meiji University, 1-1 Kanda Surugadai, Chiyoda-ku, Tokyo 101-8301, Japan. Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: G32.

The Macroeconomic Implications of Regulatory Capital Adequacy Requirements for Korean Banks

The capital adequacy requirement, combined with the flight to quality, contributed to a drastic credit slowdown and a sharp recession in Korea in the aftermath of the financial crisis. Since most banks were placed under the strengthened capital adequacy constraints, they reduced loans to firms with high credit risks. As a result, bank-dependent small and medium-sized enterprises (SMEs) were badly hit, and eventually demand for bank loans fell. The reduction in loans was most visible among banks with poor capital adequacy, yet the overall change in bank portfolios had a disproportionately large negative influence on financial conditions for SMEs. In conclusion, the banks' response to capital adequacy requirements resulted in changes in the loan/bond ratio which, in turn, reduced loans to SMEs and caused a sharp cut in production. The resulting contraction in SME production created a polarized industrial structure and a chronic depression in the traditional sectors of the economy. The introduction of capital adequacy requirements (CARs) in the wake of financial crisis worsened conditions for SMEs and weakened the validity of the CARs that were mainly necessitated by successive failures among larger firms.

The Demand for Bank Loans and the “State of Trade”

(1999). The Demand for Bank Loans and the “State of Trade”. Journal of Post Keynesian Economics: Vol. 21, No. 3, pp. 441-454.

Costs of Adjustment, Portfolio Separation, and the Dynamic Behavior of Bank Loans and Deposits

This paper develops a model of the banking firm and tests for the presence of 'portfolio separation.' The theoretical model generalizes existing intertemporal adjustment-costs models by assuming that these costs coexist simultaneously on both sides of the bank's balance sheet. Our analysis predicts that bank loan demand and deposit supply respond to past, current and expected fixture values of the federal funds rate, deposit rate, and loan rate. We estimate the model and find that the restrictions imposed by the portfolio separation assumption are inconsistent with the estimated behavior of the banking firms in our sample. We also find some limited empirical support for our extended model of the adjustment cost process. Copyright 1995 by Ohio State University Press.