Long-term interest rates and bank loan supply: Evidence from firm-bank loan-level data

Arito Ono, Kosuke Aoki, Shinichi Nishioka, Kohei Shintani and Yosuke Yasui
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Kosuke Aoki: University of Tokyo
Shinichi Nishioka: Bank of Japan
Yosuke Yasui: Bank of Japan

No 16-E-2, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper examines the effects of long-term interest rates on bank loan supply. Using a simple mean-variance model of bank portfolio selection subject to the value-at-risk (VaR) constraint, we make theoretical predictions on two transmission channels through which lower long-term interest rates increase loan supply: (i) the portfolio balance channel and (ii) the bank balance sheet channel. We construct a unique and massive firm-bank loan-level panel dataset for Japan spanning the period 2002-2014 and test our theoretical predictions to find the following. First, an unanticipated reduction in long-term interest rates increased bank loan supply, which lends support to the existence of the portfolio balance channel. Second, banks that enjoyed larger capital gains on their bond holdings due to a decline in interest rates significantly increased their loan supply, which lends support to the existence of the bank balance sheet channel. Further, the bank balance sheet channel was stronger in the case of loans to smaller, more leveraged, and less creditworthy firms, which suggests that a stronger balance sheet leads banks to increase their loan supply to credit-constrained and riskier firms.

Keywords: portfolio balance channel; bank balance sheet channel; value-at-risk constraint (search for similar items in EconPapers)
JEL-codes: E44 E52 G11 G21 (search for similar items in EconPapers)
Date: 2016-03-02
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Long-term interest rates and bank loan supply: Evidence from firm-bank loan-level data (2018)
Working Paper: Long-term interest rates and bank loan supply: Evidence from firm-bank loan-level data (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:boj:bojwps:wp16e02

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