Review of Finance Vol. 24 No. 1 2020

Some Borrowers Are More Equal than Others: Bank Funding Shocks and Credit Reallocation

Olivier De Jonghe¹; Hans Dewachter²; Klaas Mulier³; Steven Ongena⁴; Glenn Schepens⁵

¹ National Bank of Belgium and CentER, Tilburg University · ² National Bank of Belgium · ³ Ghent University and National Bank of Belgium · ⁴ University of Zurich, SFI, and CEPR · ⁵ European Central Bank

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 toward low-risk firms. 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.

DOI

10.1093/rof/rfy040

Volume

24

Issue

1

Pages

1-43

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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