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The recent slowdown of bank lending in Spain: are supply-side factors relevant?

Listed author(s):
  • Ignacio Hernando

    ()

    (Banco de España)

  • Ernesto Villanueva

    ()

    (Banco de España)

Using information of the balance sheets of Spanish banks between 1995 and 2009, we estimate the average impact of current and anticipated changes in banks’ capital on firm lending. We isolate the role of credit supply factors using the variation in capital growth associated to the bank-specific historical exposure to real estate development –measured 10 years before the outburst of the financial crisis- and its interaction with the change in housing prices in the provinces where they operate. We further control for the quality of borrowers by using industry fixed effects. Our main results suggest firstly that lagged exposure to real estate development and its interaction with prices explain banks’ capital growth and the overall doubtful loans ratio after 2008 – in turn, a determinant of anticipated changes in capital. And, secondly, that the deterioration of banks’ capital position has had a negative, although of a limited magnitude, effect on the supply of loans to non-construction firms. Our interpretation is that banks that have experienced capital shortfalls or banks that have increased their capital but without reaching the level that is demanded by financial markets might have had no option but to reduce their lending. The relatively small magnitude of credit supply factors may be explained by the weakness of loan demand in a context of a deep recession

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/12/Fich/dt1206e.pdf
File Function: First version, January 2012
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 1206.

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Length: 50 pages
Date of creation: Jan 2012
Handle: RePEc:bde:wpaper:1206
Contact details of provider: Web page: http://www.bde.es/

Web page: http://www.bde.es/bde/en/secciones/informes/Publicaciones_se/docs/
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  1. Michael Ehrmann & Leonardo Gambacorta & Jorge Mart�nez-Pag�s & Patrick Sevestre & Andreas Worms, 2001. "Fynancial Systems and the Role of Banks in Monetary Policy Transmission in the Euro area," Temi di discussione (Economic working papers) 432, Bank of Italy, Economic Research and International Relations Area.
  2. Wako Watanabe, 2007. "Prudential Regulation and the "Credit Crunch": Evidence from Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 639-665, 03.
  3. William Francis & Matthew Osborne, 2009. "Bank regulation, capital and credit supply: Measuring the Impact of Prudential Standards," Occasional Papers 36, Financial Services Authority.
  4. Ugo Albertazzi & Domenico J. Marchetti, 2010. "Credit supply, flight to quality and evergreening: an analysis of bank-firm relationships after Lehman," Temi di discussione (Economic working papers) 756, Bank of Italy, Economic Research and International Relations Area.
  5. Skander J. van den Heuvel, 2002. "Does bank capital matter for monetary transmission?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 259-265.
  6. Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2004. "Does bank capital affect lending behavior?," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 436-457, October.
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