Library Header Image
LSE Research Online LSE Library Services

External financing costs and banks' loan supply: does the structure of the bank sector matter

Ostergaard, Charlotte (2000) External financing costs and banks' loan supply: does the structure of the bank sector matter. Financial Markets Group Discussion Papers (357). Financial Markets Group, The London School of Economics and Political Science, London, UK.

[img] Text (dp357) - Published Version
Download (268kB)


This paper investigates whether banks' loan supply depend on internally generated capital in a fashion that varies according to the size-structure of the bank sector. Banks may experience liquidity constraints if it is costly to raise uninsured funds and recent evidence suggests that external financing costs may be particularly high for small banks. Considering that retail loan markets are predominantly local in nature, this paper asks whether the potential significance of individual-bank constraints carry over to a regional level in a manner that affects the overall supply of bank credit to local loan markets. Panel data for US states is used to study how state-level loan supply covaries with cash flow in bank systems with different size-structures. Shifts in the demand for loans induced by the Tax Reform Act of 1986 is used to identify loan supply. The results produce strong evidence of state-level supply effects. It is shown that loan supply of bank systems with a high percentage of small banks depends pro-cyclically on banks' internal generation of capital and that no systematic covariation is present in bank systems with relatively few small banks.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2000 The Author
Divisions: Financial Markets Group
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
Date Deposited: 04 Jul 2023 10:42
Last Modified: 16 May 2024 12:29

Actions (login required)

View Item View Item


Downloads per month over past year

View more statistics