Some borrowers are more equal than others: Bank funding shocks and credit reallocation. National Bank of Belgium, Working Paper No. 361

De Jonghe, Olivier and Dewachter, Hans and Mulier, Klaas and Ongena, Steven and Schepens, Glenn (2018) Some borrowers are more equal than others: Bank funding shocks and credit reallocation. National Bank of Belgium, Working Paper No. 361. [Working Paper]

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Abstract

This paper provides evidence on the strategic lending decisions made by banks facing a negative funding shock. Using bank-firm level credit data, we show that banks reallocate credit within their loan portfolio in at least three different ways. First, banks reallocate to sectors where they have a high market share. Second, they also reallocate to sectors in which they are more specialized. Third, they reallocate credit towards low-risk _rms. These reallocation effects are economically large. A standard deviation increase in sector market share, sector specialization or firm soundness reduces the transmission of the funding shock to credit supply by 22, 8 and 10 %, respectively.

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