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Tracing Banks’ Credit Allocation to their Funding Costs

Author

Listed:
  • Anne Duquerroy

    (Banque de France)

  • Adrien Matray

    (Princeton University, NBER and CEPR)

  • Farzad Saidi

    (University of Bonn & CEPR)

Abstract

We quantify how banks’ funding costs affect their lending behavior and the real economy. For identification, we exploit banks’ heterogeneous liability structure and the existence of regulated deposits in France whose rates are set by the government. Using administrative credit-registry and regulatory bank data, we find that a one-percentage point increase in funding costs reduces credit by 17%. To insulate their profits, banks reach for yield and rebalance their lending towards smaller and riskier firms. These changes are not compensated for by less affected banks at the aggregate city level, with repercussions for firms’ investment.

Suggested Citation

  • Anne Duquerroy & Adrien Matray & Farzad Saidi, 2022. "Tracing Banks’ Credit Allocation to their Funding Costs," Working Papers 309, Princeton University, Department of Economics, Center for Economic Policy Studies..
  • Handle: RePEc:pri:cepsud:309
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    More about this item

    Keywords

    bank funding costs; deposits; credit supply; SMEs; savings;
    All these keywords.

    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
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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