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Long-term interest rates and bank loan supply: Evidence from firm-bank loan-level data

Author

Listed:
  • Arito Ono

    (Chuo University)

  • Kosuke Aoki

    (University of Tokyo)

  • Shinichi Nishioka

    (Bank of Japan)

  • Kohei Shintani

    (Bank of Japan)

  • Yosuke Yasui

    (Bank of Japan)

Abstract

This paper examines the effects of long-term interest rates on bank loan supply. Using a simple mean-variance model of bank portfolio selection subject to the value-at-risk (VaR) constraint, we make theoretical predictions on two transmission channels through which lower long-term interest rates increase loan supply: (i) the portfolio balance channel and (ii) the bank balance sheet channel. We construct a unique and massive firm-bank loan-level panel dataset for Japan spanning the period 2002-2014 and test our theoretical predictions to find the following. First, an unanticipated reduction in long-term interest rates increased bank loan supply, which lends support to the existence of the portfolio balance channel. Second, banks that enjoyed larger capital gains on their bond holdings due to a decline in interest rates significantly increased their loan supply, which lends support to the existence of the bank balance sheet channel. Further, the bank balance sheet channel was stronger in the case of loans to smaller, more leveraged, and less creditworthy firms, which suggests that a stronger balance sheet leads banks to increase their loan supply to credit-constrained and riskier firms.

Suggested Citation

  • Arito Ono & Kosuke Aoki & Shinichi Nishioka & Kohei Shintani & Yosuke Yasui, 2016. "Long-term interest rates and bank loan supply: Evidence from firm-bank loan-level data," Bank of Japan Working Paper Series 16-E-2, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp16e02
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    Cited by:

    1. Yoshiaki Ogura, 2019. "Search-for-Yield under Prolonged Monetary Easing and Aging," Working Papers e142, Tokyo Center for Economic Research.
    2. Ugo Albertazzi & Andrea Nobili & Federico M. Signoretti, 2021. "The Bank Lending Channel of Conventional and Unconventional Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(2-3), pages 261-299, March.
    3. Katsuhiro Oshima, 2017. "Search-for-Yield and Business Cycles," KIER Working Papers 962, Kyoto University, Institute of Economic Research.
    4. Kiyotaka Nakashima & Masahiko Shibamoto & Koji Takahashi, 2017. "Risk-Taking Channel of Unconventional Monetary Policies in Bank Lending," Discussion Paper Series DP2017-24, Research Institute for Economics & Business Administration, Kobe University, revised Apr 2019.
    5. Rodrigo Barbone Gonzalez, 2019. "Monetary policy surprises and employment: evidence from matched bank-firm loan data on the bank lending-channel," BIS Working Papers 799, Bank for International Settlements.
    6. Ogura, Yoshiaki, 2020. "Intensified lending competition and search-for-yield under prolonged monetary easing," Journal of the Japanese and International Economies, Elsevier, vol. 56(C).
    7. Kensuke Fukunaga & Daisuke Miyakawa, 2022. "Supply Chain Network and Credit Supply," IMES Discussion Paper Series 22-E-08, Institute for Monetary and Economic Studies, Bank of Japan.

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    More about this item

    Keywords

    portfolio balance channel; bank balance sheet channel; value-at-risk constraint;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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