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Banks’ Financial Distress, Lending Supply and Consumption Expenditure

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  • H. Evren Damar
  • Reint Group
  • Adi Mordel
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    Abstract

    The paper employs a unique identification strategy that links survey data on household consumption expenditure to bank-level data in order to estimate the effects of bank financial distress on consumer credit and consumption expenditures. Specifically, we show that households whose banks were more exposed to funding shocks report significantly lower levels of non-mortgage liabilities compared to a matched sample of households. The reduced access to credit, however, does not result in lower levels of consumption. Instead, we show that households compensate by drawing down liquid assets. Only households without the ability to draw on liquid assets reduce consumption. The results are consistent with consumption smoothing 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, where even temporary adverse credit supply shocks are associated with significant real effects.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2014/02/wp2014-7.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 14-7.

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    Length: 53 pages
    Date of creation: 2014
    Date of revision:
    Handle: RePEc:bca:bocawp:14-7

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    Related research

    Keywords: Credit and credit aggregates; Domestic demand and components; Financial Institutions;

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    References

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    1. Sumit Agarwal & Chunlin Liu & Nicholas Souleles, 2007. "The reaction of consumer spending and debt to tax rebates; evidence from consumer credit data," Working Papers 07-34, Federal Reserve Bank of Philadelphia.
    2. Dell''Ariccia, Giovanni & Detragiache, Enrica & Rajan, Raghuram G, 2005. "The Real Effect of Banking Crises," CEPR Discussion Papers 5088, C.E.P.R. Discussion Papers.
    3. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," NBER Working Papers 10784, National Bureau of Economic Research, Inc.
    4. Atif Mian & Amir Sufi, 2010. "Household Leverage and the Recession of 2007–09," IMF Economic Review, Palgrave Macmillan, vol. 58(1), pages 74-117, August.
    5. Guido W. Imbens & Jeffrey M. Wooldridge, 2009. "Recent Developments in the Econometrics of Program Evaluation," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 5-86, March.
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    7. Tullio Jappelli & Luigi Pistaferri, 2010. "The Consumption Response to Income Changes," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 479-506, 09.
    8. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
    9. Jason Allen & Robert Clark & Jean-François Houde, 2008. "Market Structure and the Diffusion of E-Commerce: Evidence from the Retail Banking Industry," Working Papers 08-32, Bank of Canada.
    10. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 149-185, February.
    11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    12. Puri, Manju & Rocholl, Jörg & Steffen, Sascha, 2011. "Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects," Journal of Financial Economics, Elsevier, vol. 100(3), pages 556-578, June.
    13. Alessie, Rob & Hochguertel, Stefan & Weber, Guglielmo, 2001. "Consumer Credit: Evidence from Italian Micro Data," CEPR Discussion Papers 3071, C.E.P.R. Discussion Papers.
    14. Atif R. Mian & Amir Sufi, 2010. "Household Leverage and the Recession of 2007 to 2009," NBER Working Papers 15896, National Bureau of Economic Research, Inc.
    15. Ivashina, Victoria & Scharfstein, David, 2010. "Bank lending during the financial crisis of 2008," Journal of Financial Economics, Elsevier, vol. 97(3), pages 319-338, September.
    16. Ethan Cohen-Cole & Burcu Duygan-Bump & José Fillat & Judit Montoriol-Garriga, 2008. "Looking behind the aggregates: a reply to “Facts and Myths about the Financial Crisis of 2008”," Risk and Policy Analysis Unit Working Paper QAU08-5, Federal Reserve Bank of Boston.
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