Determinants of credit growth and the bank-lending channel in Peru: A loan level analysis

Focus

This paper investigates how the specific characteristics of Peruvian banks can have different effects on the supply of loans, the bank lending channel and the impact of variation in metal prices. The analysis is made for both the domestic and foreign currency, which is a special characteristic of the Peruvian case, and we use loan-level data and information on bank balance sheets. The methodology consists on a panel data model with fixed effect following Jimenez et al. (2012) and Gambacorta and Marques-Ibanez (2011).

Contribution

Knowing the variables that affect the supply of credit, the effectiveness of the banking lending channel and the effect of metal prices on domestic lending is important for policy decisions. We contribute to the literature of bank lending channel by estimating these relationships considering loans in domestic and foreign currency. A key feature of our paper is the use of loan-level data, which is important because the recent literature on the subject has highlighted the need to use this confidential data to make the results more robust.

Findings

Our results show that well-capitalized, high-liquidity, low-risk, more profitable banks tend to grant more credit, especially in the domestic currency. Moreover, we found evidence that reserve requirements both in domestic and foreign currency are effective in curbing domestic credit in Peru, giving support to the central bank's active use of reserve requirements as a macroprudential tool to smooth the credit cycle. Finally, we found that banks with more diversified funding sources are less affected after a negative commodity price change.

Abstract

This paper uses loan-level data from Peru's credit registry to determine how the role of bank-specific characteristics (i.e. bank size, liquidity, capitalization, funding, revenue, and profitability) may affect the supply of credit in domestic and foreign currency. Also, we analyze how these characteristics affect the banks' response to monetary policy shocks. Finally, we assess how the link between bank-specific characteristics and credit supply is affected by global financial conditions and commodity price changes. Our results show that well-capitalized, high-liquidity, low-risk, more profitable banks tend to grant more credit, especially in domestic currency. Moreover, we found evidence that reserve requirements both in domestic and foreign currency are effective in curbing domestic credit in Peru, giving support to the BCRP's active use of RRs as a macroprudential tool to smooth out the credit cycle. Last, we found that banks with more diversified funding sources are less affected after a negative commodity price change.

JEL codes: E44, G21, G32, L25

Keywords: credit channel, monetary policy, credit registry data