Assessing the Sources of Credit Supply Tightening: Was the Sovereign Debt Crisis Different from Lehman?

We estimate a structural econometric model for the credit market in Italy, using bank-level data on lending and interest rates and identifying shifts in demand and supply based on the responses of Italian banks to the Eurosystem’s Bank Lending Survey. We distinguish supply restrictions due to increased borrowers’ riskiness from those due to banks’ balance sheet constraints, and test for the presence of credit rationing. We assess whether the effects of supply tightening differed during the sovereign debt crisis compared with the global financial crisis. We find that the effects of supply shocks transmit to loan quantities via an increase in lending rates and are larger when they reflect banks’ funding difficulties as opposed to a deterioration of borrowers’ riskiness. During phases of acute financial tensions, there is evidence of credit-rationing phenomena, related to banks’ assessment of the constraints on their capital position. Based on a counterfactual exercise, the effects of the supply restriction on the cost and amount of credit were larger during the sovereign debt crisis than the global crisis, mostly reflecting the larger contribution of banks’ funding conditions.