3.4 Bank Heterogeneity Liquidity and Capital Channels We want to understand better the mechanism by which higher exposure to real estate can imply higher credit supply in 2004-07. What friction was preventing loan supply from expanding previously The literature typically points to agency problems that make external finance costly for banks to raise. There are two main potential channels. First, the binding the constraint could be bank capital requirements. That is, equity is the costly input that banks are economizing on. This suggests that the effect of the 2004-07 shock to be largest for banks that initially had low capital ratios. Alternatively, it could be that deposits are the costly input that banks are economizing. In this case, we might expect the effect of the 2004-07 shock to be largest for banks that initially had high costs of raising uninsured deposits. To test the two hypotheses, we use the benchmark model of Table III (and IV) and analyze the effects that some bank characteristics related to ex-ante bank liquidity and capital have on credit outcomes depending on the ex-ante exposure of the bank to real estate. The results are shown in Table V. We introduce the interaction of real estate exposure with the log of total assets, the capital ratio, the interbank ratio (lending minus borrowing in the interbank market, and with ROA, which are the bank variables we use as bank controls, and add two additional ones on liquidity and capital, which are bank deposit rate and bank NPLs. Overall we find strong evidence that the main channel at work is bank liquidity. The impact of bank real estate exposure on the softening of standards is stronger for banks which are ex-ante liquidity constrained (which we proxy for either banks that ex-ante borrow more from the whole interbank market or that ex-ante pay more for deposits note that these two variables are highly correlated -57%). Results on bank capital are not robust and, differently from bank liquidity, different components of bank capital (capital ratio, profits which is the main determinant of change in bank capital and NPLs) have different signs and are not robust.
