Banks' business model and credit supply in Chile: the role of a state-owned bank

Focus

During the global financial crisis (GFC) of 2008-09 banks in the world suffered losses not observed since the Great Depression of 1929. The response from banks regulatory authorities included measures affecting how banks grant loans, react to monetary policy shocks, and respond to global shocks. 

In this paper, we study the case of Chile, a small developing economy and exporter of raw materials, which is open to international financial markets. Despite having a sound economic system, the country was still affected by global shocks. 

We study how changes in the Chilean banks' characteristics affect the supply of commercial loans. We quantify if these changes affect how monetary policy affects the loans supply. Also, we assess how sensitive banks are to changes in global conditions, i.e., financial uncertainty, liquidity, political uncertainty, and commodity prices. Lastly, we study the differential role of the Chilean publicly owned bank (Banco Estado), in the commercial loans supply.

Contribution

To this end, we set up a new and unique database for Chilean banks for the period between the first quarter of 2000 and the last quarter of 2016. We focus on commercial loans, which represent about sixty percent of total loans in Chile, meaning that our results are sufficiently general. To the best of our knowledge, no other work before this has studied these questions with a dataset of this kind. Our estimations build on the models in Gambacorta and Marques-Ibanez (2011) and Jimenez et al. (2012).

Findings

Our results indicate that Chilean banks' provisions, retail loans and share of short-term funding have had a significant role in shaping the commercial loans. While provisions have had a negative relationship with the commercial loans, for retail loans and short-term funding the sign is the opposite. Regarding the interaction with monetary policy, better capitalized banks are less sensitive to changes in the monetary policy interest rate, and therefore less likely to affect the loans supply. Finally, we find that Banco Estado played a key role during the aftermath of the GFC, by expanding its loans supply while most other banks did the reverse.

Abstract

During the Global Financial Crisis, banks suffered losses on a scale not witnessed since the Great Depression, partly due to two major structural developments in the banking industry; deregulation combined with financial innovation. In the aftermath of the financial crisis, the regulatory response concentrated on the Basel III recommendations, raising core capital requirements for banking institutions, which affected their business models and funding patterns. Consequently, these changes have had significant implications for how banks grant loans, how they react to monetary policy shocks, and how they respond to external shocks. We find evidence of significant interactions between the bank lending channel and both monetary and global shocks in Chile. These links have changed significantly after the Global Financial Crisis. In particular, they have been shaped by the counter-cyclical behavior of a state-owned bank.

JEL codes: E40, E44, E51, E52, E58, G21

Keywords: bank lending channel, global factors, Banco Estado