Owe a Bank Millions, the Bank Has a Problem: Credit Concentration in Bad Times

Sumit Agarwal, Ricardo Correa, Bernardo Morais, Jessica Roldán () and Claudia Ruiz-Ortega ()
Additional contact information
Bernardo Morais: https://www.federalreserve.gov/econres/bernardo-c-morais.htm
Claudia Ruiz-Ortega: https://www.worldbank.org/en/about/people/c/claudia-ruiz
Authors registered in the RePEc Author Service: Claudia Ruiz Ortega

No 1288, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: How does a bank react when a substantial share of its borrowers suffer a large negative shock? To answer this question we exploit the 2014 collapse of energy prices using the universe of Mexican commercial bank loans. We show that, after the drop in energy prices, banks exposed to the energy sector increased their exposure to these borrowers even more, relaxing credit margins to their larger debtors in the sector. An increase of one standard deviation in a bank's ex-ante exposure to the energy sector increased the loan volume to borrowers in the sector by 18 percent and reduced interest rates by 6 percent, even though borrower's credit default swap spreads were widening. Highly exposed banks amplified this sector-specific shock to the rest of the economy by contracting lending to other sectors, with important real effects, as the borrowers could not switch credit suppliers. Finally, the energy price shock had a large negative impact on macro outcomes, especially in the capital-intensive secondary sector. Quantitatively, a one standard deviation increase in the exposure of a state's banks to the energy sector reduced its GDP by 1.8 percent.

Keywords: credit exposures; Bank lending; Financial stability; Commodity prices; Emerging markets (search for similar items in EconPapers)
JEL-codes: E52 E58 G01 G21 G28 (search for similar items in EconPapers)
Pages: 44
Date: 2020-07-07
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1288

DOI: 10.17016/IFDP.2020.1288

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