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Long-term interest rates and bank loan supply

: Evidence from firm-bank loan-level data

March 2, 2016
Arito Ono*1
Kosuke Aoki*2
Shinichi Nishioka*3
Kohei Shintani*4
Yosuke Yasui*5

Abstract

This paper examines the effects of long-term interest rates on bank loan supply.  Using a simple mean-variance model of bank portfolio selection subject to the value-at-risk (VaR) constraint, we make theoretical predictions on two transmission channels through which lower long-term interest rates increase loan supply: (i) the portfolio balance channel and (ii) the bank balance sheet channel.  We construct a unique and massive firm-bank loan-level panel dataset for Japan spanning the period 2002-2014 and test our theoretical predictions to find the following.  First, an unanticipated reduction in long-term interest rates increased bank loan supply, which lends support to the existence of the portfolio balance channel.  Second, banks that enjoyed larger capital gains on their bond holdings due to a decline in interest rates significantly increased their loan supply, which lends support to the existence of the bank balance sheet channel.  Further, the bank balance sheet channel was stronger in the case of loans to smaller, more leveraged, and less creditworthy firms, which suggests that a stronger balance sheet leads banks to increase their loan supply to credit-constrained and riskier firms.

JEL Classifications
E44, E52, G11, G21

Keywords
portfolio balance channel, bank balance sheet channel, value-at-risk constraint

The authors thank Seisaku Kameda, Daisuke Miyakawa, Koji Nakamura, Toshitaka Sekine, Shigenori Shiratsuka, Toshinao Yoshiba, and staff members of the Bank of Japan for valuable comments.  The authors are also grateful to Teikoku Databank, Ltd. for collaborating in the construction of the dataset used for the analysis.  Aoki gratefully acknowledges financial support from the Center for Advanced Research in Finance (CARF, University of Tokyo) and the JSPS Grant-in-Aid for Scientific Research No. 25380223, while Ono gratefully acknowledges financial support through the JSPS Grants-in-Aid for Scientific Research Nos. 25220502 and 15H06619.  The views expressed in this paper are ours and do not necessarily reflect those of the Bank of Japan or any of the institutions with which we are affiliated.

*1Faculty of Commerce, Chuo University
E-mail : a-ono@tamacc.chuo-u.ac.jp
*2Graduate School of Economics, University of Tokyo
E-mail : kaoki@e.u-tokyo.ac.jp
*3Research and Statistics Department, Bank of Japan
E-mail : shinichi.nishioka@boj.or.jp
*4Research and Statistics Department, Bank of Japan
E-mail : kouhei.shintani@boj.or.jp
*5Research and Statistics Department, Bank of Japan (currently Cabinet Office)
E-mail : yousuke.yasui@boj.or.jp

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