Bank Equity Value and Loan Supply

36 Pages Posted: 15 May 2020

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

Abstract

We study how bank equity values affect loan supply. We exploit granular balance sheet information on euro area banks matched with financial market data. We address endogeneity concerns by instrumenting bank stock prices with a shifter derived from each bank stock price's sensitivity to non-financial corporations' equity values. Our results indicate that, other things equal, rises in bank stock prices cause increases in corporate and household lending, and in bank capitalization. We interpret these results as due to bank managers reading the rises in their bank's stock price as reductions in their bank's cost of equity

Keywords: Banks, Stock Prices, Loan Supply, Equity Funding

JEL Classification: G21, G31, G32

Suggested Citation

Girotti, Mattia and Horny, Guillaume, Bank Equity Value and Loan Supply (May 2020). Banque de France Working Paper No. 767, Available at SSRN: https://ssrn.com/abstract=3600868 or http://dx.doi.org/10.2139/ssrn.3600868

Mattia Girotti

Banque de France ( email )

Paris
France

Guillaume Horny (Contact Author)

Banque de France ( email )

Paris
France

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