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Aggregate Uncertainty and the Supply of Credit, Fabian Valencia

Recent studies show that uncertainty shocks have quantitatively important effects on the real economy. This paper examines one particular channel at work: the supply of credit. It presents a model in which a bank, even if managed by risk-neutral shareholders and subject to limited liability, can exhibit self-insurance, and thus loan supply contracts when uncertainty increases. This prediction is tested with the universe of U.S. commercial banks over the period 1984-2010. Identification of credit supply is achieved by looking at the differential response of banks according to their level of capitalization. Consistent with the theoretical predictions, increases in uncertainty reduce the supply of credit, more so for banks with lower levels of capitalization. These results are weaker for large banks, and are robust to controlling for the lending and capital channels of monetary policy, to different measures of uncertainty, and to breaking the dataset in subsamples. Quantitatively, uncertainty shocks are almost as important as monetary policy ones with regards to the effects on the supply of credit
Table Of Contents
Cover; Contents; I: Introduction; List of Figures; 1 Loan Growth and Uncertainty; II: Theoretical Framework; 2 Marginal Value of Bank Capital and Optimal Lending Function; III: Empirical Analysis; List of Tables; 1 Summary Statistics; 2 Regression Results; 3 Bank Capitalization and Bank Size; 3 Subsamples and Year Fixed Effects; 4 Alternative Measures of Uncertainty; 4 Fraction of C&I loans under commitment; 5 Loan type and bank size; 6 Bank Capital and Lending Channels of Monetary Policy; IV: Conclusions; References; Appendices; I: Numerical Solution Method; 7 Parameter Values
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (27 p.)
Specific Material Designation
Form Of Item

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