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Credit Supply: Are there negative spillovers from banks’ proprietary trading?

Michael Kurz and Stefanie Kleimeier ()
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Michael Kurz: Finance

No 5, Research Memorandum from Maastricht University, Graduate School of Business and Economics (GSBE)

Abstract: Do banks that heavily engage in proprietary trading reduce credit supply relative to their non-trading peers? We answer this question by looking at credit provided by the 135 leading banks in the global corporate loan market between 2003 and 2016. We find that banks with greater trading expertise supply less credit during economically stable times than their non-trading peers and even less during crisis times. This double effect can be attributed to US banks. International banks only reduce their credit supply during crises. We show that these spillovers from trading to credit supply have adverse consequences for the real economy as firms’ ability to invest in capital and expand their workforce is reduced. During a crisis, firms that rely on banks with high trading expertise are most severely affected. Overall, our results suggest that the mandates by global regulators to separate trading from commercial banking are well advised.

Keywords: credit supply; proprietary trading; international lending; banking; corporate loans (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-fdg
Date: 2019-02-07
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