Banks' Financial Distress, Lending Supply and Consumption Expenditure

SAFE Working Paper No. 39

48 Pages Posted: 6 Jan 2014 Last revised: 13 Mar 2014

See all articles by H. Evren Damar

H. Evren Damar

Hobart and William Smith Colleges; Halle Institute for Economic Research

Reint Gropp

Halle Institute for Economic Research

Adi Mordel

Bank of Canada

Multiple version iconThere are 2 versions of this paper

Date Written: February 2014

Abstract

We employ a unique identification strategy linking survey data on household consumption expenditure to bank-level data to estimate the effects of bank financial distress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of non-mortgage liabilities. This, however, does not result in lower levels of consumption. Households compensate by drawing down liquid assets to smooth consumption in the face of a temporary adverse lending supply shock. The results contrast with recent evidence on the real effects of finance on firms’ investment and employment decisions.

Keywords: credit supply, banking, financial crisis, consumption expenditure, liquid assets, consumption smoothing

JEL Classification: E21, E44, G21, G01

Suggested Citation

Damar, H. Evren and Gropp, Reint and Mordel, Adi, Banks' Financial Distress, Lending Supply and Consumption Expenditure (February 2014). SAFE Working Paper No. 39, Available at SSRN: https://ssrn.com/abstract=2375103 or http://dx.doi.org/10.2139/ssrn.2375103

H. Evren Damar

Hobart and William Smith Colleges ( email )

Geneva, NY 14456
United States

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Adi Mordel

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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