Bank-to-bank lending channel and the transmission of bank liquidity shocks: Evidence from France

Good liquidity is essential for the banking system to function properly and supply credit to the real sector. However, several banks all over the world face large shocks to their liquidity supply due to numerous factors. This study contributes to the literature on the transmission of liquidity shocks by investigating the bank-to-bank lending behavior of French banks during the global financial crisis (2008 and 2009). In addition, we examine the factors strongly influencing the liquidity of the interbank deposits market. First, using a fixed-effects model on a sample of 85 French banks for the period from 2005 to 2010, we find that the deposits channel plays an important role in the transmission of liquidity shocks across the banking system. Second, we use difference-in-difference methodology to study the effects of liquidity shock on bank lending. Our results show that French banks reduced their bank-to-bank lending significantly during the financial crisis period. Moreover, our results suggest that the reduction could have been due to deposit activities.     

Sovereign risk and the bank lending channel in Europe

The main purpose of this article is to analyze how sovereign risk influences the loan supply reaction of banks to monetary policy through the bank lending channel. Additionally, we aim to test whether this reaction differs in easy and tight monetary regimes. Using a sample of 3125 banks from the euro zone between 1999 and 2012, we find that sovereign risk plays an important role in determining loan supply from banks during tight monetary regimes. Banks in higher sovereign risk countries reduce lending more during tight regimes. However, we find little evidence to support any relationship between sovereign risk and loan supply reaction to monetary policy expansions. These results are very interesting for the way monetary policy is conducted in Europe. Banking union, banking system strength, and the budget control of governments would be necessary measures to reduce the heterogeneous transmission of the monetary policy in the euro zone.     

Foreign bank penetration and the lending channel in emerging economies: Evidence from bank-level panel data

This paper examines the main implications of recently increasing foreign bank penetration on bank lending as a channel of monetary policy transmission in emerging economies. Using a dynamic panel model of loan growth, we investigate the loan granting behavior of 1273 banks in the emerging economies of Asia, Latin America, and Central and Eastern Europe during the period from 1996 to 2003. Applying the pooled OLS, system GMM, and panel VAR estimators, we find consistent evidence that foreign banks are less responsive to monetary shocks in host countries, as they adjust their outstanding loan portfolios and interest rates to a lesser extent than domestic private banks, independent of their liquidity, capitalization, size, efficiency, and credit risk, and although there exists a bank lending channel in the emerging economies, it is declining in strength due to the increased level of foreign bank penetration. We also explore possible driving factors for the different responses of foreign and domestic banks to monetary policy shocks by investigating foreign banks’ different behavior during banking crises and tranquil periods, the effects of mode of entry to host countries, the home-country effects, and the response of foreign banks from OECD countries vs. all foreign countries including non-OECD countries. We suggest the access of foreign banks to funding from parent banks through internal capital markets as the most convincing explanation.     

The bank lending channel in the Malaysian Islamic and conventional banking system

This paper examines the bank lending channel of monetary transmission in Malaysia, a country with a dual banking system including both Islamic and conventional banks, over the period 1994: 01-2015:06. A two-regime threshold vector autoregression (TVAR) model is estimated to take into account possible nonlinearities in the relationship between bank lending and monetary policy under different economic conditions. The results indicate that Islamic credit is less responsive than conventional credit to interest rate shocks in both the high and low growth regimes; however, the sub-sample estimation shows that its response has increased in more recent years becoming quite similar to that of conventional credit. Moreover, the relative importance of Islamic credit shocks in driving output growth is notable in the low growth regime, their effects being positive. These findings can be interpreted in terms of the distinctive features of Islamic banks.     

The positive side of bank wealth management products: Evidence from bank lending rate

The systemic risk and negative social impacts from bank-issued wealth management products (WMPs) are well studied by scholars and practitioners in China. Using hand-collected bank data, we find that WMPs help reduce banks’ cost of funds, which is then passed on to their borrowers as lower borrowing cost. This finding shows an upside of this controversial but increasingly popular bank product. We propose four mechanisms through which WMPs can lower banks’ cost of funds: structural change in deposits, cross-subsidization, liquidity effect, and related-party transactions. We find supporting evidence for those mechanisms, and their effects vary across state-owned, joint-stock, and city commercial banks. Those variations are consistent with the unique characteristics of each bank group. We further explore the competition for capital between state-owned and non-state-owned banks. The results suggest that state-owned banks offer significantly higher interest rates for deposits as non-state-owned banks expand in the same region. WMP issuance is likely a differentiation strategy in response to the competition for deposits.     

Greasing the wheels of bank lending: Evidence from private firms in China

Bribery, rather than firm performance, largely determines the extent to which private firms access bank credit in China. Bribery enables an economic outcome whereby firms with better economic performance are awarded larger loans. These firms also pay more in terms of bribes. Although satisfactory firm performance does determine whether firms can access loans, it does so only for loans originated by the big-four banks. For loans originated by smaller banks, performance is not essential for firms to secure loan access. Our evidence sheds light on the surprising finding of earlier studies that Chinese banks use commercial logic in their lending practices despite being endowed with a weak institutional framework.     

Leverage and investment under a state-owned bank lending environment: Evidence from China

This study examines the relations between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks. We obtain three major findings. First, there is a negative relation between leverage and investment. Second, the negative relation between leverage and investment is weaker in firms with low growth opportunities and poor operating performance than in firms with high growth opportunities and good operating performance. Third, the negative relation between leverage and investment is weaker in firms with a higher level of state shareholding than in firms with a lower level of state shareholding. Overall, our results are consistent with the hypothesis that the state-owned banks in China impose fewer restrictions on the capital expenditures of low growth and poorly performing firms and also firms with greater state ownership. This creates an overinvestment bias in these firms.     

Identification of a loan supply function: A cross-country test for the existence of a bank lending channel

Using the theoretical predictions of the Bernanke–Blinder [Bernanke, B.S., Blinder, A.S., 1988. Is it money or credit or both or neither? Credit, money, and aggregate demand. American Economic Review 78, 435–459] model, we seek to examine the existence of a bank lending channel through the empirical identification of a loan supply function and to assess the impact of differential bank characteristics on banks’ ability to supply loans. To this end, we estimate a loan supply model and test for the restrictions implied by perfect substitutability between loans and bonds in bank portfolios. Estimations are carried out on bank panel data for six OECD countries, the results showing that a bank lending channel is at work in only two of them. Moreover, we find that the relevance of bank characteristics is hardly a decisive factor in the identification of a loan supply function.     

The determinants of global bank lending: Evidence from bilateral cross-country data

This paper finds that factors determined outside of a country, at the quarterly frequency and especially after 2008, are more closely related to the global bank loans it receives. These loans are generally more stable when global banks face more competition and have a higher presence in the recipient country. We obtain our results by using bilateral lending data from 15 countries and a unique methodology to identify and compare the independent effects of external and internal factors. We identify theoretical mechanisms that can explain our empirical findings and draw more detailed inferences for competition and global bank presence by solving a simple model of global banking.     

Monetary policy and bank lending:: Evidence from German banking groups

This paper analyses the impact of monetary shocks on bank lending in Germany. We follow a cross-sectoral approach by looking at six different banking groups. In general, smaller banks hold a larger buffer of liquid assets which they can use to offset monetary shocks. In addition, the response of bank lending after a monetary contraction is very different across banking sectors. Lending by the credit co-operatives, which are on average the smallest banks, declines most, whereas big banks are able to shield their loans portfolio against monetary shocks. Overall, our results provide support for the existence of a bank lending channel.     

Changes in bank lending standards and the macroeconomy

Identifying macroeconomic effects of credit shocks is difficult because many of the same factors that influence the supply of loans also affect the demand for credit. Using bank-level responses to the Federal Reserve's Loan Officer Opinion Survey, we construct a new credit supply indicator: changes in lending standards, adjusted for the macroeconomic and bank-specific factors that also affect loan demand. Tightening shocks to this credit supply indicator lead to a substantial decline in output and the capacity of businesses and households to borrow from banks, as well as to a widening of credit spreads and an easing of monetary policy.     

Learning from a rival bank and lending boom

When bankers observe a rival winning in the interbank competition for lending to a firm, they infer that the firm may be more promising than they had thought. From this consideration, they loosen their creditworthiness tests and lower the interest rates they offer in the next lending competition for the firm. Increased interbank competition reduces the impact of this observational learning and decreases the credit risk taken by each bank because of a severe winner's curse, while it increases the aggregate risk taken by the entire banking sector.     

Rescue packages and bank lending

This paper examines whether the rescue measures adopted during the global financial crisis helped to sustain the supply of bank lending. The analysis proposes a setup that allows testing for structural shifts in the bank lending equation, and employs a novel dataset covering large international banks headquartered in 14 major advanced economies for the period 1995–2010. While stronger capitalisation sustains loan growth in normal times, banks during a crisis can turn additional capital into greater lending only once their capitalisation exceeds a critical threshold. This suggests that recapitalisations may not translate into greater credit supply until bank balance sheets are sufficiently strengthened.     

Anxious periods and bank lending

We examine the lending behavior of banks during anxious periods. The main characteristic of anxious periods is that the perceptions and expectations about economic conditions worsen for economic agents even though the economy is not in a recession. We identify distinct periods of anxiety for consumers, CEOs (firms) and analysts. Subsequently, we study the lending behavior of US banks during the anxious quarters from 1985 to 2010, using bank-level data. The results show that banks’ lending falls when consumers and analysts are anxious, and this effect is more pronounced when banks hold a higher level of credit risk. These effects are more pronounced in anxious periods that were followed by recessions, and in these periods loan growth also responds negatively to the anxiety of CEOs. Yet, these effects are quite less prevalent in the period after 2001.     

Liquidity regulation and bank lending

Bank liquidity shortages during the global financial crisis of 2007–2009 led to the introduction of liquidity regulations, the impact of which has attracted the attention of academics and policymakers. In this paper, we investigate the impact of liquidity regulation on bank lending. As a setting, we use the Netherlands, where a Liquidity Balance Rule (LBR) was introduced in 2003. The LBR was imposed on Dutch banks only and did not apply to other banks operating elsewhere within the Eurozone. Using this differential regulatory treatment to overcome identification concerns and a difference-in-differences approach, we find that the LBR increased the volume of lending by Dutch banks relative to other banks located in the Eurozone. Increased equity, an inflow of retail deposits and subsequent increase in balance sheet size allowed Dutch banks to increase lending despite having to meet the LBR requirements. The LBR also affected the loan composition of Dutch banks (with corporate and retail lending increasing more than mortgage lending) and the maturity profile of loan portfolios. Our results have relevance for policymakers tasked with monitoring the impact of liquidity regulations on banks and the real economy.     

Does bank lending affect output? Evidence from the U.S. states

This paper uses a panel of state-level data to test whether changes in bank loan supply affect output. Since the U.S. states are small open economies with fixed exchange rates, state-specific shocks to money demand are automatically accommodated, leading to changes in lending if banks rely on deposits as a source of funding. Using these shocks as an instrumental variable, I find that shocks to money demand have large and statistically significant effects on the supply of bank loans, but loans have small, often negative and statistically insignificant effects on output.     

Public bank lending in times of crisis

This paper studies the role of government-owned banks in the event of financial crises. The study takes an empirical perspective focusing on bank lending. We compare the lending responses across government-owned and private banks to financial crises using the balance sheet information of 764 major banks headquartered in 50 countries over the period of 1994–2009. Using a nested panel regression framework that allows for parameter shifts in the bank lending equation, we find robust evidence that government-owned banks increase their lending during crises relative to normal times, while private banks’ lending decreases. Government-owned banks thus counteract the lending slowdown of private banks. The findings suggest that governments can play an active counter-cyclical role in their banking systems directly through government-owned banks.     

Basel II and bank lending to emerging markets: Evidence from the German banking sector

This paper investigates whether the new Basel Accord will induce a change in bank lending to emerging markets using a comprehensive new data set on German banks’ foreign exposure. We test two interlinked hypotheses on the conditions under which the change in the regulatory capital would leave lending flows unaffected. This would be the case if (i) the new regulatory capital requirement remains below the economic capital and (ii) banks’ economic capital to emerging markets already adequately reflects risk. On both accounts the evidence indicates that the new Basel Accord should have a limited effect on lending to emerging markets.     

Sentiment volatility and bank lending behavior

Using a panel of commercial, co-operative and savings banks from G7 countries, we investigate whether the changes in sentiment and its volatility affect banks' lending behavior. We show that the changes in economic agents' sentiment and its volatility affect bank lending negatively, while the impact sizes differ across indicators. We also examine volatility effects on banks' loan growth as uncertainty reaches excessive levels. We highlight the role that several bank-specific variables play on bank lending and discuss to what extent uncertainty effects are transmitted on credit growth through them.     

Climate transition risk and bank lending

We investigate whether and how banks in the global syndicated loan market adjusted the pricing and supply of credit to account for higher climate transition risk (CTR) in the years following the 2015 Paris Agreement. We measure CTR by considering the pollution levels of borrowers and the engagement of countries where borrowers are headquartered in addressing climate change issues. The evidence is mixed and points to nonlinear relations between lending variables and CO2 emissions. Policy events such as the Paris Agreement and government environmental awareness are significant climate risk drivers that, when combined, may amplify banks' perception of CTR.