Supervisory shocks to banks' credit standards and their macroeconomic impact |
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Institution: | 1. Department of Economics and Law, Sapienza University, Via del castro laurenziano 9, 00185 Rome, Italy;2. New School for Social Research, New York, USA;3. University of Bielefeld, Germany |
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Abstract: | Credit standards reported in the Bank Lending Surveys (BLS) of the European Central Bank (ECB) summarize banks’ sentiment about credit market tightness, and they strongly comove with credit growth. This paper introduces a new external instrument that captures an exogenous source of variation in credit standards, allowing us to identify a structural shock that negatively affects the credit supply. The instrument accounts for mandatory rotations of external auditors within credit institutions of nine euro-area countries. By estimating local projections, this paper finds that an unexpected supervisory measure at the banking-system level features significant dynamic causal effects at the macroeconomic level, which are also state-dependent. |
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Keywords: | Credit supply Banking supervision Instrumental variables Local projections |
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