Credit Supply: Are there negative spillovers from banks’ proprietary trading?

Michael Kurz, Stefanie Kleimeier

Research output: Working paperProfessional

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Abstract

Do banks that heavily engage in proprietary trading reduce credit supply relative to their non-trading peers? We answer this question by looking at credit provided by the 135 leading banks in the global corporate loan market between 2003 and 2016. We find that banks with greater trading expertise supply less credit during economically stable times than their non-trading peers and even less during crisis times. This double effect can be attributed to US banks. International banks only reduce their credit supply during crises. We show that these spillovers from trading to credit supply have adverse consequences for the real economy as firms’ ability to invest in capital and expand their workforce is reduced. During a crisis, firms that rely on banks with high trading expertise are most severely affected. Overall, our results suggest that the mandates by global regulators to separate trading from commercial banking are well advised.
Original languageEnglish
PublisherMaastricht University, Graduate School of Business and Economics
Number of pages65
DOIs
Publication statusPublished - 7 Feb 2019

Publication series

SeriesGSBE Research Memoranda
Number005

JEL classifications

  • g01 - Financial Crises
  • g21 - "Banks; Depository Institutions; Micro Finance Institutions; Mortgages"
  • g28 - Financial Institutions and Services: Government Policy and Regulation

Keywords

  • credit supply
  • proprietary trading
  • international lending
  • banking
  • corporate loans

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