Commodity Prices and Bank Lending

Abstract

We analyze the transmission of changes in commodity prices to bank lending in a large sample of developing countries. A bank‐level analysis shows that a fall in commodity net export prices is associated with a reduction of bank lending, particularly for commodity exporters and during episodes of terms‐of‐trade decline. We complement this analysis with loan‐level data from a credit register, which allows us to identify the effect of a commodity price shock on the supply of credit, controlling for unobserved factors that could drive borrowers' credit demand. Results show that banks with relatively lower deposits and poor asset quality transmit the changes in commodity prices to lending more aggressively. (JEL F30, F34, G21, Q02)

Local Public Corruption and Bank Lending Activity in the United States

“…The use of these state controls is important because they can affect bank lending activity and also may correlate with local public corruption (Glaeser and Saks 2006;Smith 2016). Lastly, we saturate the model with bank, state, and time fixed effects, i , s , and t , respectively (DeYoung et al 2018; Agarwal et al 2019). We provide the summary statistics of the variables, the median values of public corruption by state, and the correlation matrix in Tables 2, 3 and 4 respectively.…”

Commodity Price Movements and Banking Crises

“…Commodity price fluctuations do not only affect the real economy, but also the financial sector. Agarwal et al (2017) show that a fall in commodity prices reduces bank lending, an effect which is stronger for commodity exporters and driven by commodity price busts. More generally, a drop in commodity prices could lead to financial instability and crises through different channels, which are especially pertinent in commodity-exporting LICs: first, lower prices translate into reduced revenues for exporting firms, which find it more difficult to service their debt obligations, with potential negative 3 See also Figure B-2 in the Appendix.…”

“…First, we emphasize the key role that commodity prices play in triggering financial sector stress. 8 In a related paper, Agarwal et al (2017) show that declining commodity prices are associated with worsening bank health and lead to a contraction of bank lending in LICs. Here, we move one step further to assess whether fluctuations in commodity prices can help predict banking crises.…”

Introduction to the Symposium on Contemporary Banking Research: The Use of Fixed Effects to Disentangle Loan Demand From Loan Supply

“…Morales‐Acevedo and Ongena () apply such a control for loan demand at the industry level in order to assess the impact of bank branch robberies in Colombia on subsequently approved loans and their conditions, conjecturing that such a stressful event experienced by loan officers leads to temporarily emotionally motivated lending decisions. Agarwal, Duttagupta, and Presbitero () use this method to establish how reductions of commodity prices affect lending in developing countries, or more specifically, which bank characteristics lead to a stronger transmission of the global price shock through loan supply. Their investigation is based on loan application data for Uganda.…”