DP17072 Tracing Banks' Credit Allocation to their Funding Costs

Author(s): Anne Duquerroy, Adrien Matray, Farzad Saidi
Publication Date: February 2022
Keyword(s): bank funding costs, credit supply, deposits, monetary-policy transmission, Savings, SMEs
JEL(s): E23, E32, E44, G20, G21, L14
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17072

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.