The Recent Slowdown of Bank Lending in Spain: Are Supply-Side Factors Relevant?

50 Pages Posted: 25 Jan 2012

See all articles by Ignacio Hernando

Ignacio Hernando

Banco de España

Ernesto Villanueva

Banco de España - Research Department

Date Written: January 24, 2012

Abstract

Using information of the balance sheets of Spanish banks between 1995 and 2009, we estimate the average impact of current and anticipated changes in banks’ capital on firm lending. We isolate the role of credit supply factors using the variation in capital growth associated to the bank-specific historical exposure to real estate development – measured 10 years before the outburst of the financial crisis - and its interaction with the change in housing prices in the provinces where they operate. We further control for the quality of borrowers by using industry fixed effects. Our main results suggest firstly that lagged exposure to real estate development and its interaction with prices explain banks’ capital growth and the overall doubtful loans ratio after 2008 – in turn, a determinant of anticipated changes in capital. And, secondly, that the deterioration of banks’ capital position has had a negative, although of a limited magnitude, effect on the supply of loans to non-construction firms. Our interpretation is that banks that have experienced capital shortfalls or banks that have increased their capital but without reaching the level that is demanded by financial markets might have had no option but to reduce their lending. The relatively small magnitude of credit supply factors may be explained by the weakness of loan demand in a context of a deep recession.

Keywords: Bank lending, bank capital, loan supply, instrumental variables

JEL Classification: E51, G21

Suggested Citation

Hernando, Ignacio and Villanueva, Ernesto, The Recent Slowdown of Bank Lending in Spain: Are Supply-Side Factors Relevant? (January 24, 2012). Banco de Espana Working Paper No. 1206. Available at SSRN: https://ssrn.com/abstract=1991106 or http://dx.doi.org/10.2139/ssrn.1991106

Ignacio Hernando (Contact Author)

Banco de España ( email )

Madrid 28014
Spain
+34 91 338 5186 (Phone)
+34 91 338 5678 (Fax)

Ernesto Villanueva

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

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