Bank Lending and Credit Creation around the Financial crisis

This study examines the relationship between each asset type and the changes in amount of lending and credit creation before, during and after the financial crisis 2007-2009 in Euro zone banks. The data are gathered from the Bankscope database and contains 354 banks from 19 Euro zone countries. This study uses fixed effect panel regressions to investigate the impact of different types of assets on lending ability of banks during the financial crisis 2007-2009. This study provides evidence that bank deposit and bank capital, both have positive relationship with bank lending during financial crisis. In other words, these two valuable types of asset can assist banks to continue to lend during the financial destress. In addition, bank capital has a positive relationship with bank credit creation during financial crisis. Thus, this study provides evidence that bank deposit and bank capital act as reliable sources of financing for Euro zone banks during financial turmoil. Furthermore, the results of the study show that liquidity risk has a greater influence on the large banks compare to smaller counterparts.