Title

Tracing Banks’ Credit Allocation to their Funding Costs

Author(s)

Anne Duquerroy Anne Duquerroy (Banque de France)

Adrien Matray Adrien Matray (Princeton University, NBER and CEPR)

Farzad Saidi Farzad Saidi (University of Bonn & CEPR)

Abstract

We quantify how banks’ funding costs affect their lending behavior and the real economy. 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.

Creation Date

2022-09

Section URL ID

Paper Number

309

URL

https://gceps.princeton.edu/wp-content/uploads/2023/03/wp309_Matray-et-al_bankfundingcost.pdf

File Function

Jel

E21, E44, G20, G21, O16

Keyword(s)

bank funding costs, deposits, credit supply, SMEs, savings

Suppress

false

Series

3