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Aggregate Uncertainty and the Supply of Credit

Author

Listed:
  • Jeanne Verrier

    (Johns Hopkins University)

  • Fabian Valencia

    (International Monetary Fund)

Abstract

We examine empirically how bank lending responds to aggregate uncertainty with the universe of U.S. commercial banks over the period 1984-2010. Identification of supply is achieved by looking at the differential response of banks by how liquid their balance sheets are. We find that increases in uncertainty reduce the supply of credit, but less so for banks with more liquid balance sheets. Our results are robust to a number of tests. We then present a model that rationalizes these results and show that they are consistent with a world in which banks face frictions in raising external finance.

Suggested Citation

  • Jeanne Verrier & Fabian Valencia, 2013. "Aggregate Uncertainty and the Supply of Credit," 2013 Meeting Papers 514, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:514
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    Cited by:

    1. Sophia Chen, 2015. "Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel," IMF Working Papers 2015/065, International Monetary Fund.
    2. Alessandri, Piergiorgio & Bottero, Margherita, 2020. "Bank lending in uncertain times," European Economic Review, Elsevier, vol. 128(C).
    3. Laurent Ferrara & Pierre Guérin, 2018. "What are the macroeconomic effects of high‐frequency uncertainty shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(5), pages 662-679, August.
    4. Grimme, Christian, 2017. "Uncertainty and the Cost of Bank vs. Bond Finance," MPRA Paper 79852, University Library of Munich, Germany.
    5. Nils Jannsen & Galina Potjagailo & Maik H. Wolters, 2019. "Monetary Policy during Financial Crises: Is the Transmission Mechanism Impaired?," International Journal of Central Banking, International Journal of Central Banking, vol. 15(4), pages 81-126, October.
    6. Claudia M Buch & Manuel Buchholz & Lena Tonzer, 2015. "Uncertainty, Bank Lending, and Bank-Level Heterogeneity," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(4), pages 919-954, November.
    7. María Cantero‐Saiz & Sergio Sanfilippo‐Azofra & Begoña Torre‐Olmo, 2022. "Sovereign Risk and the Bank Lending Channel: Differences across Countries and the Effects of the Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(1), pages 285-312, February.
    8. Nguyen Tran Thai Ha & Phan Gia Quyen, 2018. "The Impact of Funding Liquidity on Risk-taking Behaviour of Vietnamese Banks: Approaching by Z-Score Measure," International Journal of Economics and Financial Issues, Econjournals, vol. 8(3), pages 29-35.
    9. Valencia, Fabián, 2014. "Banks' Precautionary Capital And Credit Crunches," Macroeconomic Dynamics, Cambridge University Press, vol. 18(8), pages 1726-1750, December.

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