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Balance Sheet Strength and Bank Lending During the Global Financial Crisis

Author/Editor: Tümer Kapan | Camelia Minoiu
Authorized for Distribution: May 8, 2013
Electronic Access: Free Full Text (PDF file size is 1,002KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: We examine the role of bank balance sheet strength in the transmission of financial sector shocks to the real economy. Using data from the syndicated loan market, we exploit variation in banks’ reliance on wholesale funding and their structural liquidity positions in 2007Q2 to estimate the impact of exposure to market freezes during 2007–08 on the supply of bank credit. We find that banks with strong balance sheets were better able to maintain lending during the crisis. In particular, banks that were ex-ante more dependent on market funding and had lower structural liquidity reduced the supply of credit more than other banks. However, higher and better-quality capital mitigated this effect. Our results suggest that strong bank balance sheets are key for the recovery of credit following crises, and provide support for regulatory proposals under the Basel III framework.
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Series: Working Paper No. 13/102
Subject(s): Global Financial Crisis 2008-2009 | Banks | Loans | Liquidity | Banking sector | Financial crisis | Economic models
    Published:   May 8, 2013        
    ISBN/ISSN:   9781484315842/1018-5941   Format:   Paper
    Stock No:   WPIEA2013102   Pages:   38
    Price:   US$18.00
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