Bank lending in uncertain times (with Margherita Bottero)

Abstract:
We study the impact of economic uncertainty on the supply of bank credit using a monthly dataset that includes all loan applications submitted by a sample of 650,000 Italian firms between 2003 and 2012. We find that an increase in aggregate uncertainty has three effects. First, it reduces banks’ likelihood to accept new credit applications. Second, it lengthens the time firms have to wait for their loans to be issued. Third, it makes banks less responsive to fluctuations in short-term interest rates, weakening the bank lending channel of monetary policy. The influence of uncertainty is relatively stronger for poorly capitalized lenders and/or opaque or distant borrowers.