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External Financing Costs and Banks Loan Supply: Does the Structure of the Bank Sector Matter?

Listed author(s):
  • Charlotte Ostergaard

This paper investigates whether banks loan supply depend on internally generated capital in a fashion that varies according to the size-structure of the bank sector. Banks may experience liquidity constraints if it is costly to raise uninsured funds and recent evidence suggests that external financing costs may be particularly high for small banks. Considering that retail loan markets are predominately local in nature, this paper ask whether the potential significance of individual-bank constraints carry over to a regional level in a manner that affects the overall supply of bank credit to local loan markets. Panel data for US states is used to study how state-level loan supply covaries with cash flow in bank systems with different size-structure. Shifts in the demand for loans induced by the Tax Reform Act of 1986 is used to identify loan supply. The results produce strong evidence of state-level supply effects. It is shown that loan supply of bank systems with a high percentage of small banks depends pro-cyclically on banks internal generation of capital and that no systematic covariation is present in bank systems with relatively few small banks.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp357.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp357.

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Date of creation: Aug 2000
Handle: RePEc:fmg:fmgdps:dp357
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. Hannan, Timothy H., 1991. "Bank commercial loan markets and the role of market structure: evidence from surveys of commercial lending," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 133-149, February.
  2. Jayaratne, Jith & Strahan, Philip E, 1998. "Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence from Commercial Banking," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 239-273, April.
  3. Anil K Kashyap & Jeremy C. Stein, 1997. "What Do a Million Banks Have to Say About the Transmission of Monetary Policy?," NBER Working Papers 6056, National Bureau of Economic Research, Inc.
  4. Ostergaard, C. & Sorensen, B.E. & Yosha, O., 1998. "Permanent Income, Consumption, and Aggregate Constraints: Evidence from US States," Papers 02-98, Tel Aviv.
  5. Jeremy C. Stein, 1998. "An Adverse-Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 466-486, Autumn.
  6. Ostergaard, C. & Sorensen, B.E. & Yosha, O., 1998. "Permanent Income, Consumption, and Aggregate Constraints: Evidence from US States," Papers 02-98, Tel Aviv.
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