Balance Sheet Strength and Bank Lending During the Global Financial Crisis
Federal National Mortgage Association (Fannie Mae)
International Monetary Fund (IMF)
October 28, 2015
We examine the role of bank balance sheet strength in the transmission of financial sector shocks to the real economy. In particular, we exploit variation in banks’ reliance on wholesale funding and their structural liquidity positions in 2007Q2 to estimate the impact of exposure to the market freezes of 2007-2008 on the subsequent supply of large corporate loans. We find that banks with stronger balance sheets were better able to maintain lending during the global stage of the financial crisis. In particular, banks that were ex ante more dependent on market funding and had lower structural liquidity reduced the supply of credit more than other banks. However, higher levels of better-quality capital mitigated this effect. Our results suggest a bank funding channel by which healthier banks have access to cheaper market funds. These findings indicate that strong financial intermediary balance sheets are key for the recovery of credit after large financial sector shocks and support regulatory proposals under the Basel III framework.
Number of Pages in PDF File: 47
Keywords: bank lending channel, wholesale funding, capital, net stable funding ratio, Basel III
JEL Classification: G21, G18, G01
Date posted: April 9, 2013 ; Last revised: October 29, 2015
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