Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications

Abstract

We analyze the impact of monetary policy on the supply of bank credit. Monetary policy affects both loan supply and demand, thus making identification a steep challenge. We therefore analyze a novel, supervisory dataset with loan applications from Spain. Accounting for time-varying firm heterogeneity in loan demand, we find that tighter monetary and worse economic conditions substantially reduce loan granting, especially from banks with lower capital or liquidity ratios; responding to applications for the same loan, weak banks are less likely to grant the loan. Finally, firms cannot offset the resultant credit restriction by applying to other banks. (JEL E32, E44, E52, G21, G32)

When Credit Dries Up: Job Losses in the Great Recession

“…If not, either the bank denied it or else the firm obtained funding elsewhere (see Jiménez et al, 2012a).…”

The recent slowdown in bank lending in Spain: are supply-side factors relevant?

“…Albertazzi and Marchetti (2010) use highly detailed data on bank-firm relationships (compiled by the credit register of the Banca d'Italia) and find that those banks with poor capitalization displayed a higher contraction in bank lending over the period from September 2008 (just after the collapse of Lehman Brothers) to March 2009. Jiménez et al (2012) estimate large impacts of monetary shocks on loan granting decisions of bank with relatively low capital asset and liquidity ratios. Among other factors, the discrepancies among those results could be due to differences in the level of disaggregation of the data (loan level data vs bank balance sheets) or to the nature of the shocks considered in each paper.…”

The Recent Slowdown of Bank Lending in Spain: Are Supply-Side Factors Relevant?

“…Khwaja and Mian (2008) or Jiménez et al (2012) propose holding the (unobservable) quality of a firm constant by means of firm-year fixed effects using matched data of banks and firms. As a robustness check, we redo the analysis using loan-level data from the credit register of Banco de España (BdE).…”

“…Berrospide and Edge (2010) use aggregate data and find a very limited role for bank capital asset ratios in business lending growth. Using loan level data, Albertazzi and Marchetti (2010) and Jiménez et al (2012) find larger impacts made by banks' balance sheets. The discrepancy among those results could either be due to cross-country differences in the dependence of firms on bank lending or, alternatively, to differences in the level of data disaggregation.…”