Balance Sheet Strength and Bank Lending During the Global Financial Crisis

Balance Sheet Strength and Bank Lending During the Global Financial Crisis
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Volume/Issue:
2013/102
Series:
IMF Working Papers
Author(s):
Tümer Kapan, and Camelia Minoiu
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
May 2013
DOI:
http://dx.doi.org/10.5089/9781484315842.001
ISBN:
9781484315842
ISSN:
1018-5941
Page:
38
We examine the role of bank balance sheet strength in the transmission of financial sector shocks to the real economy. Using data from the syndicated loan market, we exploit variation in banks’ reliance on wholesale funding and their structural liquidity positions in 2007Q2 to estimate the impact of exposure to market freezes during 2007–08 on the supply of bank credit. We find that banks with strong balance sheets were better able to maintain lending during the crisis. In particular, banks that were ex-ante more dependent on market funding and had lower structural liquidity reduced the supply of credit more than other banks. However, higher and better-quality capital mitigated this effect. Our results suggest that strong bank balance sheets are key for the recovery of credit following crises, and provide support for regulatory proposals under the Basel III framework.
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Balance Sheet Strength and Bank Lending During the Global Financial Crisis1

Author(s):
Tümer Kapan, and Camelia Minoiu
Published Date:
May 2013
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