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Credit Supply - Identifying Balance-Sheet Channels With Loan Applications And Granted Loans

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Executive Summary

To identify credit availability the authors analyze the extensive and intensive margins of lending with loan applications and all loans granted in Spain. They find that during the period analyzed both worse economic and tighter monetary conditions reduce loan granting, especially to firms or from banks with lower capital or liquidity ratios. Moreover, responding to applications for the same loan, weak banks are less likely to grant the loan. Their results suggest that firms cannot offset the resultant credit restriction by turning to other banks. Importantly the bank-lending channel is notably stronger when they account for unobserved time-varying firm heterogeneity in loan demand and quality.

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