Working Paper: CEPR ID: DP17072
Authors: Anne Duquerroy; Adrien Matray; Farzad Saidi
Abstract: We quantify how banks' funding costs affect their lending behavior directly, and indirectly by feeding back to their net worth. For identification, we exploit banks' heterogeneous liability structure and the existence of regulated deposits in France whose rates are set by the government. Using administrative credit-registry and regulatory bank data, we find that a one-percentage-point increase in funding costs reduces credit by 17%. To insulate their profits, banks reach for yield and rebalance their lending towards smaller and riskier firms. These changes are not compensated for by less affected banks at the aggregate city level, with repercussions for firms' investment.
Keywords: bank funding costs; monetary policy transmission; deposits; credit supply; SMEs; savings
JEL Codes: E23; E32; E44; G20; G21; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Funding costs (G32) | Credit supply (E51) |
| Funding costs (G32) | Lending behavior (G21) |
| Funding costs (G32) | Shift in composition of bank credit supply (E51) |
| Funding costs (G32) | Economic repercussions for firms' investment decisions (D25) |