Global Retail Lending in the Aftermath of the US Financial Crisis: Distinguishing between Supply and Demand Effects

This paper examines the broader effects of the U.S. financial crisis on global lending to retail customers. In particular we examine retail bank lending in Germany taking advantage of a unique dataset of German savings banks over the period 2006-2008 for which we have the universe of loan applications and loans granted in this time period. Our experimental setting allows us to distinguish between those savings banks affected by the U.S. financial crisis, through their holdings in Landesbanken with substantial subprime exposure, and unaffected savings banks. We are further able to distinguish between demand and supply side effects of bank lending and find that the U.S. financial crisis induced a contraction in the supply of retail lending in Germany. While demand for loans goes down it is not substantially different for the affected and non-affected banks. We find evidence that the affected banks reject substantially more loan applications than non-affected banks. This effect is particularly strong for smaller and more liquidity-constrained banks as well as for mortgage as compared to consumer loans. We also find that bank-depositor relationships help mitigate these supply side effects.

Steffen, Sascha, Manju Puri and Jörg Rocholl (2011), Global Retail Lending in the Aftermath of the US Financial Crisis: Distinguishing between Supply and Demand Effects, Journal of Financial Economics , 556-578