A loan-level analysis of bank lending in Mexico

Focus

This paper studies how bank characteristics affect the credit supply in Mexico. We analyse how these features influence banks' response to shocks. We compare the conduct of domestic banks to that of foreign banks' subsidiaries active in Mexico. Finally, we study the role of other micro variables (loan, bank-firm relationship, firm, industry) in the credit supply and the transmission of shocks. For this purpose, we use private loan-level data from the Mexican credit registry. 

Contribution

The structure of financial systems in emerging market economies has changed due to the internationalization of banks, technological innovation, shifts in sources of funding, and post-crisis regulatory reforms. In Mexico, these changes have led to high concentration in the banking sector (the seven largest banks have a market share of 80%) and a high involvement of foreign subsidiaries (80% of the banking system's assets). We contribute to the literature on how these changes have affected the drivers of the credit supply in Mexico. In addition, we contribute to the analysis of the main channels through which monetary policy and external shocks affect the credit supply. 

Findings

We find that banks that supply more credit are large, well-capitalised, rely on stable sources of funding and have low risk indicators. In general, bank characteristics that have a positive relationship with loan growth shield banks from monetary policy and external shocks. Second, we find that, compared to domestic banks, foreign subsidiaries reduce their credit supply more actively when the economy faces a shock. Finally, loan growth to high-quality creditors with strong banking relationships is greater and less affected by shocks.

Abstract

We use loan-level data from the Mexican credit registry to study how bank-specific characteristics in influence credit supply. We explore how these characteristics affect the transmission of monetary policy and their role in building banks' resilience to external shocks. Then, we compare the response of the credit supply of foreign subsidiaries to that of domestic banks. Finally, we study the impact of other micro characteristics on the credit supply and their influence on the transmission of shocks. Our results highlight the importance of banks' strong balance sheets and stable sources of funding for the provision of credit in Mexico. In general, these characteristics shelter banks from shocks.

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

Keywords: credit registry, credit supply, bank-specic characteristics, bank lending channel