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Bank lending puzzles: Business models and the responsiveness to policy

Author

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  • Adrian Blundell-Wignall
  • Caroline Roulet

Abstract

Banks are still dealing with historic losses buried in their balance sheets. As a result, the US economy is picking up only modestly and Europe is sinking further into recession, despite unprecedented low interest rates and policies to compress the term premium. The aim of this study is to explore the business activities of banks, with a special focus on their lending behaviour, and its responsiveness to unconventional monetary policy. The paper shows that deleveraging has been mainly via mark-to-market assets falling in value, and policy is now serving to reflate these assets without a strong impact on lending. A panel regression study shows that GSIFI banks are least responsive to policy. Non-GSIFI banks respond to the lending rate spread to cash rates, the spread between lending rates and the alternative investment in government bonds, and the distance-to-default (the banks solvency). The paper shows that better lending in the USA is a result of safer banks and a better spread to government bonds – yields on the latter are too attractive relative to lending rates in Europe. Finally, the paper comments on the problem of using cyclical tools to address structural problems in banks, and suggests which alternative policies would better facilitate a financial system more aligned with lending, trust and stability and less towards high-risk activities and leverage via complex products. JEL Classification: E50, E51, E52, E58, G20, G21, G24, G28. Keywords: Bank Lending, Bank business model, deleveraging, structural policy, unconventional monetary policy, distance to default, spreads, bank separation, GSIFI.

Suggested Citation

  • Adrian Blundell-Wignall & Caroline Roulet, 2013. "Bank lending puzzles: Business models and the responsiveness to policy," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2013(1), pages 7-30.
  • Handle: RePEc:oec:dafkad:5k40m1nz55wj
    DOI: 10.1787/fmt-2013-5k40m1nz55wj
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    Citations

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    Cited by:

    1. Miguel Biron & Felipe Córdova & Antonio Lemus, 2019. "Banks' business model and credit supply in Chile: the role of a state-owned bank," BIS Working Papers 800, Bank for International Settlements.
    2. Rainer Baule & Christian Tallau, 2016. "Revisiting Basel risk weights: cross-sectional risk sensitivity and cyclicality," Journal of Business Economics, Springer, vol. 86(8), pages 905-931, November.

    More about this item

    Keywords

    bank lending; bank business model; deleveraging; structural policy; unconventional monetary policy; distance to default; spreads; bank separation; gsifi.;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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