XXV Edition

1-2 December 2016"

Some Borrowers are More Equal than Others: Bank Funding Shocks and Credit Reallocation

De Jonghe Olivier, Tilburg University
Dewachter Hans, National Bank of Belgium
Mulier Klaas, Ghent University
Ongena Steven, University of Zurich
Schepens Glenn, European Central Bank

This paper provides evidence on the domestic lending decisions made by banks facing a negative funding shock. Using bank-firm level credit data, we show that banks reallocate credit to (i) sectors where they have high sector presence, (ii) sectors in which they are heavily specialized, and (iii) low-risk firms. These reallocation effects are not only statistically but also economically significant. Furthermore, we provide insight in the timing of these reallocation decisions. Reallocation to sectors in which a bank has a high sector presence is almost instantaneous, while sector specialization starts playing a role four to five months after the shock.

Area: Banking

Keywords: Credit reallocation, bank funding shock, domestic credit, sector specialization, firm risk

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