Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications

TLDR

Monetary policy influences both loan supply and demand, complicating identification. The study examines how monetary policy affects bank credit supply. The authors use a novel supervisory dataset of Spanish loan applications. Tighter monetary policy and poorer economic conditions markedly reduce loan approvals, especially by banks with lower capital or liquidity, and firms cannot compensate by seeking alternative lenders. JEL classification: E32, E44, E52, G21, G32.

Abstract

We analyze the impact of monetary policy on the supply of bank credit. Monetary policy affects both loan supply and demand, thus making identification a steep challenge. We therefore analyze a novel, supervisory dataset with loan applications from Spain. Accounting for time-varying firm heterogeneity in loan demand, we find that tighter monetary and worse economic conditions substantially reduce loan granting, especially from banks with lower capital or liquidity ratios; responding to applications for the same loan, weak banks are less likely to grant the loan. Finally, firms cannot offset the resultant credit restriction by applying to other banks. (JEL E32, E44, E52, G21, G32)