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

  • 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 Espa�a in its series Banco de Espa�a Working Papers with number 1206.

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Length: 50 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:bde:wpaper:1206
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  1. Ehrmann, Michael & Gambacorta, Leonardo & Martinéz Pagés, Jorge & Sevestre, Patrick & Worms, Andreas, 2001. "Financial systems and the role of banks in monetary policy transmission in the euro area," Working Paper Series 0105, European Central Bank.
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  3. Jose M. Berrospide & Rochelle M. Edge, 2010. "The effects of bank capital on lending: what do we know, and what does it mean?," Finance and Economics Discussion Series 2010-44, Board of Governors of the Federal Reserve System (U.S.).
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  12. Puri, Manju & Rocholl, Jörg & Steffen, Sascha, 2011. "Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects," Journal of Financial Economics, Elsevier, vol. 100(3), pages 556-578, June.
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  15. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
  16. 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.
  17. Jie Gan, 2007. "The Real Effects of Asset Market Bubbles: Loan- and Firm-Level Evidence of a Lending Channel," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1941-1973, November.
  18. Jose M. Berrospide & Rochelle M. Edge, 2010. "The Effects of Bank Capital on Lending: What Do We Know, and What Does It Mean?," International Journal of Central Banking, International Journal of Central Banking, vol. 6(34), pages 1-50, December.
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