Rescue Packages and Bank Lending
31 Pages Posted: 18 Nov 2011
Date Written: November 1, 2011
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.
Keywords: bank lending channel, monetary policy, financial crisis, rescue packages, recapitalisation
JEL Classification: E44, G01, G21
Suggested Citation: Suggested Citation