External financing costs and banks' loan supply: does the structure of the bank sector matter

Charlotte Ostergaard

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper investigates whether banks' loan supply depend on internally generated capital in a fashion that varies according to the size-structure of the bank sector. Banks may experience liquidity constraints if it is costly to raise uninsured funds and recent evidence suggests that external financing costs may be particularly high for small banks. Considering that retail loan markets are predominantly local in nature, this paper asks whether the potential significance of individual-bank constraints carry over to a regional level in a manner that affects the overall supply of bank credit to local loan markets. Panel data for US states is used to study how state-level loan supply covaries with cash flow in bank systems with different size-structures. Shifts in the demand for loans induced by the Tax Reform Act of 1986 is used to identify loan supply. The results produce strong evidence of state-level supply effects. It is shown that loan supply of bank systems with a high percentage of small banks depends pro-cyclically on banks' internal generation of capital and that no systematic covariation is present in bank systems with relatively few small banks.

Keywords: bank lending; capital market imperfections; uninsured funds; liquidity constraints; regional macroeconomics (search for similar items in EconPapers)
JEL-codes: E44 E50 G21 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2000-09-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/119101/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119101

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().