Aggregate Uncertainty and the Supply of Credit

December 2, 2013

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Fabian Valencia. Aggregate Uncertainty and the Supply of Credit, (USA: International Monetary Fund, 2013) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Recent studies show that uncertainty shocks have quantitatively important effects on the real economy. This paper examines one particular channel at work: the supply of credit. It presents a model in which a bank, even if managed by risk-neutral shareholders and subject to limited liability, can exhibit self-insurance, and thus loan supply contracts when uncertainty increases. This prediction is tested with the universe of U.S. commercial banks over the period 1984-2010. Identification of credit supply is achieved by looking at the differential response of banks according to their level of capitalization. Consistent with the theoretical predictions, increases in uncertainty reduce the supply of credit, more so for banks with lower levels of capitalization. These results are weaker for large banks, and are robust to controlling for the lending and capital channels of monetary policy, to different measures of uncertainty, and to breaking the dataset in subsamples. Quantitatively, uncertainty shocks are almost as important as monetary policy ones with regards to the effects on the supply of credit.

Subject: Bank credit, Banking, Credit, Economic theory, Financial frictions, Financial institutions, GDP forecasting, Loans, Money, National accounts

Keywords: A. bank-borrower loan contract, Bank capital, Bank credit, Bank default, Bank level, Capitalized bank, Capital-to-asset ratio, Credit, Credit Crunch, Credit Cycles, Financial frictions, GDP forecasting, Interest rate, Loans, Monetary policy, Natural logarithm, Self-insurance, Uncertainty, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/241
Stock No:

WPIEA2013241
ISBN:

9781475513936
ISSN:

1018-5941

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