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Balance Sheet Strength and Bank Lending During the Global Financial Crisis

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  • Tümer Kapan
  • Camelia Minoiu

Abstract

We examine the role of bank balance sheet strength in the transmission of financial sector shocks to the real economy. Using data from the syndicated loan market, we exploit variation in banks’ reliance on wholesale funding and their structural liquidity positions in 2007Q2 to estimate the impact of exposure to market freezes during 2007–08 on the supply of bank credit. We find that banks with strong balance sheets were better able to maintain lending during the crisis. In particular, banks that were ex-ante more dependent on market funding and had lower structural liquidity reduced the supply of credit more than other banks. However, higher and better-quality capital mitigated this effect. Our results suggest that strong bank balance sheets are key for the recovery of credit following crises, and provide support for regulatory proposals under the Basel III framework.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/102.

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Length: 38
Date of creation: 08 May 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/102

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Keywords: Global Financial Crisis 2008-2009; Banks; Loans; Liquidity; Banking sector; Financial crisis; Economic models; bank lending channel; wholesale funding; capital; net stable funding ratio; Basel III; bank capital; return on assets; liquid asset; bank balance sheet; capital adequacy; bank funding; bank balance sheets; transmission of monetary policy; bank credit; banking supervision; bank liquidity; bank holding; banking system; financial strength; holding company; bank regulation; bank holding company; national bank; bank exposure; interbank market; capital base; bank soundness; universal bank; bank size; bank equity; capital requirement; mortgage lending; bank subsidiaries; bank capitalization; branch location; savings bank; bank finance; bank distress; bankrupt; tier 1 capital; bank asset; bank of england; bank failures; shareholder equity; financial strength rating; bank profits; bank relationships; bank of japan; banks ? balance sheets; bank ? balance sheet; central banking; liability management; investment bank;

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References

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Cited by:
  1. De Bruyckere, Valerie & Gerhardt, Maria & Schepens, Glenn & Vander Vennet, Rudi, 2013. "Bank/sovereign risk spillovers in the European debt crisis," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4793-4809.
  2. Benjamin Cohen, 2013. "How have banks adjusted to higher capital requirements?," BIS Quarterly Review, Bank for International Settlements, September.
  3. Nelson, Benjamin & Tanaka, Misa, 2014. "Dealing with a banking crisis: what lessons can be learned from Japan’s experience?," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 36-48.
  4. Antonio Scalia & Sergio Longoni & Tiziana Rosolin, 2013. "The Net Stable Funding Ratio and banks’ participation in monetary policy operations: some evidence for the euro area," Questioni di Economia e Finanza (Occasional Papers) 195, Bank of Italy, Economic Research and International Relations Area.

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