De-leveraging or de-risking? How banks cope with loss
Rhys Bidder (),
John Krainer () and
Adam Shapiro ()
No 2017-3, Working Paper Series from Federal Reserve Bank of San Francisco
Using detailed bank balance sheet data obtained under the United States’ stress testing programs we examine how a shock to banks’ net worth affects their portfolio decisions. We focus on the supply of credit (the bank lending channel) and the ultimate effect on borrowers (the credit channel), but also examine how the shock affects banks’ overall risk profile and security holdings. Our shock is derived from variation across banks in their loan exposure to industries adversely affected by the precipitous oil price declines of 2014. For corporate lending, we find significant evidence of a bank lending channel. Banks more exposed to the shock appear to have tightened credit as evidenced by tightening lending standards and reductions in lending to firms. We do not find significant evidence of a credit channel. The effect of the tightening of credit on firms’ scale seems minimal. This appears to be because firms are able to substitute to alternative financing from other banks or by drawing down pre-existing lines of credit. In terms of residential lending, the story is more subtle. Affected banks tightened credit on mortgages that they would ultimately hold in their portfolio but appear to have expanded credit for those mortgages that would predominantly be securitized. This tendency is reflected in a contemporaneous expansion in their holdings of MBS after the shock. While affected banks substantially de-risked their portfolios through adjusting their residential lending in this way, we again find that the ultimate effect on borrowers was minimal.
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