Fiscal capacity and commercial bank lending under COVID-19

Joshua Aizenman; Yothin Jinjarak; Mark M Spiegel

doi:10.1016/j.jjie.2023.101261

Fiscal capacity and commercial bank lending under COVID-19

J Jpn Int Econ. 2023 Jun:68:101261. doi: 10.1016/j.jjie.2023.101261. Epub 2023 Mar 31.

Authors

Joshua Aizenman¹, Yothin Jinjarak², Mark M Spiegel³

Affiliations

¹ Economics and SIR, NBER, University of Southern California, University Park, Los Angeles, CA 90089-0043, United States.
² ERDI, Asian Development Bank, Metro Manila, Mandaluyong 1550, Philippines.
³ Economic Research Department, Federal Reserve Bank of San Francisco, 101 Market Street, MS 1130, San Francisco, CA 94105, United States.

Abstract

We investigate the implications of government indebtedness for the efficacy of expansionary government spending in encouraging commercial bank lending growth during the COVID-19 pandemic. Our sample is a large cross-section of over 3000 banks from 71 countries. To address the likely endogeneity of government assistance, we instrument for extra-normal spending using disparities in pre-existing national political characteristics. Our results indicate that bank lending did respond to fiscal capacity, as higher public debt going into the crisis weakened the expansionary effects of higher spending on bank lending at economically and statistically significant levels. Moreover, this sensitivity was higher among weaker banks, suggesting sensitivity to the perceived implications of spending for government assistance going forward. We also found greater sensitivity in high-income economies and for small and medium-sized banks. Our results are robust to a variety of robustness tests, including perturbations in specification, sample, and estimation methodology.

Keywords: Bank lending; COVID-19; Fiscal capacity.