Credit Supply Versus Demand: Bank and Firm Balance-Sheet Channels in Good and Crisis Times

Abstract:     
Banking crises involve periods of persistently low credit and economic growth. Banks’ balance sheets are then weak but so are those of non-financial corporate borrowers. Hence, a crucial question is whether credit growth is low due to supply or to demand factors.

However convincing identification has been elusive due to a lack of detailed loan application-, bank-, and firm-level data. Access to a data-set of loan applications in Spain that is matched with complete bank and firm balance-sheet data covering the period from 2002 to 2010 allows us to identify bank and firm balance sheet channels. We find robust evidence showing that bank balance-sheet strength determines the success of loan applications and the granting of loans in crisis times. The heterogeneity in firm balance-sheet strength determines loan granting in both good and crisis times, although the potency of this firm balance-sheet channel is the largest in the latter period. Our findings therefore hold important implications for both theory and policy.

Number of Pages in PDF File: 34

Keywords: bank lending channel, credit supply, business cycle, credit crunch, capital

JEL Classification: E32, E44, E5, G21, G28

working papers series