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Banks’ Financial Distress, Lending Supply and Consumption Expenditure

Author

Listed:
  • H. Evren Damar
  • Reint Group
  • Adi Mordel

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.

Suggested Citation

  • H. Evren Damar & Reint Group & Adi Mordel, 2014. "Banks’ Financial Distress, Lending Supply and Consumption Expenditure," Staff Working Papers 14-7, Bank of Canada.
  • Handle: RePEc:bca:bocawp:14-7
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    References listed on IDEAS

    as
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    Cited by:

    1. Duchi, Fabio & Elbourne, Adam, 2016. "Credit supply shocks in the Netherlands," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 51-71.
    2. Gropp, Reint & Krainer, John & Laderman, Elizabeth, 2014. "Did Consumers Want Less Debt? Consumer Credit Demand Versus Supply in the Wake of the 2008-2009 Financial Crisis," Working Paper Series 2014-8, Federal Reserve Bank of San Francisco, revised 01 Feb 2014.
    3. repec:eee:jbfina:v:83:y:2017:i:c:p:121-134 is not listed on IDEAS
    4. Kartashova, Katya & Tomlin, Ben, 2017. "House prices, consumption and the role of non-Mortgage debt," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 121-134.
    5. Dimitris Christelis & Michael Ehrmann & Dimitris Georgarakos, 2015. "Exploring Differences in Household Debt Across Euro Area Countries and the United States," Staff Working Papers 15-16, Bank of Canada.
    6. James Chapman & H. Evren Damar, 2015. "Shock Transmission Through International Banks: Canada," Technical Reports 105, Bank of Canada.

    More about this item

    Keywords

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

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises

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