Essays in bank lending

Abstract

This thesis explores how macroprudential policies influence the lending behaviour of banks across different sectors of the economy, with particular emphasis on the interaction between regulatory interventions and the normal functioning of credit markets. Although macroprudential tools are often viewed as necessary to mitigate systemic risk, concerns persist that tighter regulatory frameworks may inadvertently constrain credit supply and impose economic costs. The central question of this thesis is whether macroprudential interventions meaningfully disrupt the normal flow of bank lending, or whether they can enhance financial resilience without compromising credit availability.

The analysis unfolds across three empirical studies, each focusing on a distinct dimension of the lending market. The first paper examines the effect of increases in macroprudential capital buffer requirements in the euro area following the COVID-19 pandemic. Using granular loan-level data from the euro area credit register, it finds that higher capital requirements did not lead to an aggregate contraction in corporate lending. While banks with limited capital headroom exhibited relatively slower loan growth—particularly toward smaller and single-banked firms—these effects were offset by credit reallocation to better-capitalised institutions. This result highlights the capacity of a well-capitalised banking sector to absorb regulatory shocks without impairing its intermediary function.

The second paper investigates how borrower-based macroprudential measures (BBMs) shape household credit risk. Employing a micro-macro simulation model calibrated on household-level data, it demonstrates that BBMs, such as loan-to-value and debt service-to-income caps, significantly lowers the probability of default and loss given default across mortgage portfolios. Importantly, these risk reductions are achieved without a broad-based decline in lending volumes. Instead, credit access becomes more selective, improving the resilience of borrower profiles and strengthening the ability of banks to maintain credit provision during adverse economic conditions.

The third paper studies the cyclicality of lending standards in the real estate sector and assesses the stabilising role of BBMs. Using supervisory data and housing market indicators, it confirms that lending standards tend to loosen during credit booms and tighten during busts, amplifying systemic risk. However, the implementation of borrower-based policies effectively moderates these cycles, thereby leading to more stable credit conditions and mitigating risks associated with housing market bubbles.

Together, the three papers converge on a unified discovery: macroprudential policy, when designed prudently and implemented in a countercyclical manner, does not materially disrupt the normal activity of bank lending. Instead, it enhances the resilience of financial institutions and promotes a more sustainable pattern of credit intermediation. The findings challenge the notion of a fundamental trade-off between regulation and lending, showing that financial stability objectives can be achieved without significant collateral costs to credit availability.

This thesis contributes to the macro-financial literature by providing new micro-founded empirical evidence on the conditional effects of macroprudential tools. It demonstrates that both capital-based and borrower-based measures operate effectively when systemic conditions are favourable, and that heterogeneity among banks and borrowers must be carefully considered in policy design. In doing so, it offers relevant insights for policymakers aiming to build more resilient financial systems while preserving the vital role of bank lending in supporting economic growth.

Date of Award	17 Feb 2025
Original language	English
Awarding Institution	Bangor University
Supervisor	Yener Altunbas (Supervisor) & Alessio Reghezza (Supervisor)