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The impact of stock market shocks on credit in France since the mid-1990s

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  • Baude, J.

Abstract

The significant stock market fluctuations observed since the mid-1990s have generated major unrealised holding gains and losses and sizeable changes in the market capitalisation of listed companies. Indeed, stock prices rose up to 2000 and then fell until 2003-2004, when they posted a recovery. Such fl uctuations have no doubt affected the way in which economic agents perceive their fi nancial position and have consequently infl uenced their fi nancial behaviour and their use of credit. This study attempts to distinguish, in changes in household and company borrowing behaviour, between the effects of a specifi c fi nancial constraint, attributable to stock market shocks, and more traditional effects, stemming from the business cycle. To do so, the study uses a model, based on the quarterly financial accounts published by the Banque de France in autumn 2004, that tracks the financial behaviour of households and companies over the recent period of equity market turbulence between 1995 and 2003. Given the subject under review, the model focuses on two fi nancial assets – loans and equities – thus making it possible to analyse the borrowing behaviour of these two agents, the structure of their fi nancial assets and the composition of companies’ liabilities. However, it does not take account of households’ real estate assets and therefore measures only the impact of equity market bubbles on credit. In this model, it is assumed that flows of bank loans to households and companies not only depend on their consumption and investment spending but on their fi nancial position as well. More specifi cally, in the case of households, they depend on their net wealth and, in the case of companies, on the share of loans in their liabilities. A stock market shock brings about changes in outstanding amounts of equities held by households and in the valuation of companies’ equity capital. The financial position of these two agents and, consequently, their borrowing behaviour are affected. According to the simulations of this model, companies in France appear much more sensitive than households to stock market shocks. Wealth effects seem to have a fairly limited impact on loans to households. However, the balance sheet structure effect appears to be largely responsible for the expansion of loans to companies. The rise in stock prices in the latter half of the 1990s seems to have sharply increased companies’ equity capital, thus allowing them to increase their leverage. Assessing the impact of an equity market bubble on credit remains, in principle, contingent on the way this bubble is measured and in particular on the assumption made regarding the share price trend growth rate that acts as the reference trend. However, whether we assume the latter to be that of the fi rst half of the 1990s, i.e. 4% per year, or even twice that rate, the amplitude of stock market fl uctuations over the period was such that this assumption is not a determining factor for the orders of magnitude. In both cases, outstanding loans to companies appeared to rise by just over 8% in 2001 compared with the amount by which they would have increased had there not been an equity market bubble.

Suggested Citation

  • Baude, J., 2005. "The impact of stock market shocks on credit in France since the mid-1990s," Financial Stability Review, Banque de France, issue 7, pages 91-104, November.
  • Handle: RePEc:bfr:fisrev:2005:7:4
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    Cited by:

    1. Clerc, L., 2007. "Understanding Asset Prices: Determinants and Policy Implications," Working papers 168, Banque de France.
    2. Philip Arestis & Ana Rosa Gonzalez, 2013. "Endogenous Bank Credit and Its Link to Housing in OECD Countries," Economics Working Paper Archive wp_750, Levy Economics Institute.

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