Some Borrowers are More Equal than Others: Bank Funding Shocks and Credit Reallocation

Abstract

This paper provides evidence on the strategic lending decisions made by banks facing a negative funding shock. Using bank-rm level credit data, we show that banks reallocate credit within their domestic loan portfolio in at least three different ways. First, banks reallocate to sectors where they have high sector presence. Second, they also reallocate to sectors in which they are heavily specialized. Third, they reallocate credit towards low-risk firms. These reallocation effects are economically large. A standard deviation improvement in sector presence, sector specialization or firm risk reduces the transmission of the funding shock to credit supply by 22, 8 and 10%,
respectively.

Keywords: Credit reallocation, bank funding shock, domestic credit, sector specialization, firm risk

JEL Classification: G01, G21