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Banks’ Financial Distress, Lending Supply and Consumption Expenditure

We employ a unique identification strategy linking survey data on household consumption expenditure to bank-level data to estimate the effects of bank financial distress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of non-mortgage liabilities. This, however, does not result in lower levels of consumption. Households compensate by drawing down liquid assets to smooth consumption in the face of a temporary adverse lending supply shock. The results contrast with recent evidence on the real effects of finance on firms’ investment and employment decisions.

01. February 2014

Authors H. Evren Damar Reint E. Gropp Adi Mordel

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Banks’ Funding Stress, Lending Supply, and Consumption Expenditure

H. Evren Damar Reint E. Gropp Adi Mordel

in: Journal of Money, Credit and Banking, No. 4, 2020

Abstract

We employ a unique identification strategy linking survey data on household consumption expenditure to bank‐level data to estimate the effects of bank funding stress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of nonmortgage liabilities. This, however, only translates into lower levels of consumption for low‐income households. Hence, adverse credit supply shocks are associated with significant heterogeneous effects.

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