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Funding shocks and banks' credit reallocation


Ongena, Steven; De Jonghe, Olivier; Dewachter, Hans; Mulier, Klaas; Schepens, Glenn (2016). Funding shocks and banks' credit reallocation. SFI Practitioner Roundups December 2016 12/16, University of Zurich.

Abstract

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 domestic loan portfolio in at least three different ways. First, banks reallocate to sectors where they have high sector presence. Second, they also reallocate to sectors in which they are heavily specialized. Third, they reallocate credit towards low-risk firms. These reallocation effects are economically large. A standard deviation improvement in sector presence, sector specialization or firm risk reduces the transmission of the funding shock to credit supply by 20, 13 and 10%, respectively. We also provide insight in the timing of these reallocation decisions. Reallocation to sectors in which a bank has a high sector presence is almost instantaneous, while sector specialization starts playing a role four to five months after the shock.

Abstract

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 domestic loan portfolio in at least three different ways. First, banks reallocate to sectors where they have high sector presence. Second, they also reallocate to sectors in which they are heavily specialized. Third, they reallocate credit towards low-risk firms. These reallocation effects are economically large. A standard deviation improvement in sector presence, sector specialization or firm risk reduces the transmission of the funding shock to credit supply by 20, 13 and 10%, respectively. We also provide insight in the timing of these reallocation decisions. Reallocation to sectors in which a bank has a high sector presence is almost instantaneous, while sector specialization starts playing a role four to five months after the shock.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:6 December 2016
Deposited On:12 Jan 2017 13:41
Last Modified:02 Feb 2018 11:30
Series Name:SFI Practitioner Roundups December 2016
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:http://sfi.ch/system/tdf/PractitionerRoundup_2016_12.pdf?file=1&type=node&id=5418&force=
Related URLs:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2774441 (Organisation)
Other Identification Number:merlin-id:14170

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