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Bank balance sheets and the transmission of financial shocks to borrowers: evidence from the 2007-2008 crisis

  • Emilia Bonaccorsi di Patti

    ()

    (Bank of Italy and World Bank)

  • Enrico Sette

    (Bank of Italy)

We use Italian data on bank lending to firms to study the transmission of shocks affecting bank balance sheets to the volume and cost of credit granted to business borrowers and to the probability of banks accepting loan applications from new borrowers during the 2007-2008 financial crisis. The identification of the credit-supply effect is based on a difference-in-difference approach because: a large number of firms in Italy borrow from more than one bank; the shocks to the wholesale funding market were exogenous to Italian banks; and Italian banks were affected to a varying extent by the crisis depending on their funding structure. Results indicate that supply conditions worsened most for the banks that were most exposed to the interbank market and for those that made the most use of securitization. While the initial capital position of banks did not significantly affect their lending, the deterioration of bank capitalization as proxied by charge-offs and profitability had a significant impact. Furthermore, our results suggest that bank capital influenced lending indirectly, with higher capital reducing the elasticity of lending to the shocks on the funding side.

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File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2012/2012-0848/en_tema_848.pdf
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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 848.

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Date of creation: Jan 2012
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Handle: RePEc:bdi:wptemi:td_848_12
Contact details of provider: Postal: Via Nazionale, 91 - 00184 Roma
Web page: http://www.bancaditalia.it

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  1. Leonardo Gambacorta & Paolo Emilio Mistrulli, 2011. "Bank heterogeneity and interest rate setting: What lessons have we learned since Lehman Brothers?," BIS Working Papers 359, Bank for International Settlements.
  2. Leonardo Gambacorta & David Marques-Ibanez, 2011. "The bank lending channel: lessons from the crisis," BIS Working Papers 345, Bank for International Settlements.
  3. Atif Mian & Asim Ijaz Khwaja, 2006. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market," NBER Working Papers 12612, National Bureau of Economic Research, Inc.
  4. Eugenio Gaiotti, 2011. "Credit availability and investment in Italy: lessons from the "Great Recession"," Temi di discussione (Economic working papers) 793, Bank of Italy, Economic Research and International Relations Area.
  5. Altunbas, Yener & Gambacorta, Leonardo & Marques-Ibanez, David, 2009. "Securitisation and the bank lending channel," European Economic Review, Elsevier, vol. 53(8), pages 996-1009, November.
  6. Ivashina, Victoria & Scharfstein, David, 2010. "Bank lending during the financial crisis of 2008," Journal of Financial Economics, Elsevier, vol. 97(3), pages 319-338, September.
  7. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
  8. Paolo Del Giovane & Ginette Eramo & Andrea Nobili, 2010. "Disentangling demand and supply in credit developments: a survey-based analysis for Italy," Temi di discussione (Economic working papers) 764, Bank of Italy, Economic Research and International Relations Area.
  9. 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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