Monetary Policy, Bank Capital, and Credit Supply: A Role for Discouraged and Informally Rejected Firms

This paper conducts the \u85rst empirical study of the bank balance sheet channel using data on discouraged and informally rejected \u85rms in addition to information on the formal loan granting process. I take advantage of a unique survey data on the credit experience of \u85rms in 8 economies that use the euro or are pegged to it over 2004-2007, and analyze the e¤ect of monetary policy and the business cycle on bank lending and risk-taking. Identi\u85cation rests on exploiting 1) the exogeneity of monetary policy to local business cycles, and 2) \u85 rm-speci\u85c and bank-speci c data to separate the supply of credit from changes in the level and composition of credit demand. Consistent with previous studies, I \u85nd that lax monetary conditions increase bank credit in general and bank credit to ex-ante risky \u85rms in particular, especially for banks with lower capital ratios. Importantly, I \u85nd that the results are considerably stronger when data on informal credit constraints are incorporated