Some Borrowers Are More Equal than Others: Bank Funding Shocks and Credit Reallocation
73 Pages Posted: 31 Jan 2019
Date Written: January 30, 2019
This paper provides evidence on the strategic lending decisions made by banks facing a negative funding shock. Using bank-firm level credit data, we show that banks reallocate credit within their loan portfolio in at least three different ways. First, banks reallocate to sectors where they have a high market share. Second, they also reallocate to sectors in which they are more specialized. Third, they reallocate credit towards low-risk firms. These reallocation effects are economically large. A standard deviation increase in sector market share, sector specialization or firm soundness reduces the transmission of the funding shock to credit supply by 22, 8 and 10%, respectively.
Keywords: credit reallocation, bank funding shock, bank credit, sector market share, sector specialization, firm risk
JEL Classification: G01, G21
Suggested Citation: Suggested Citation