Also important to note is that now the spread restriction is met for the period
1996/1997, even though it is still not met for the period 1990/199536.
However the most important point is that all the relevant conclusions drawn above
from Table 5 remain valid for Table 6. In fact, the first two columns allow us to conclude
for the existence of the credit channel ( β1 > 0 and β5 > 0 , but finite). From columns (3)
and (4) we conclude that large banks are more deposit dependent than small banks. From
column (5) and (6) we once again conclude that the dependence of banks on deposits does
not depend on the bank liquidity ratio and that the supply curve of illiquid banks is flatter
(as the coefficient of lt zit is positive). And once again from columns (7) and (8) we
conclude that the credit channel is more important for the less capitalised banks.
A cautionary note on the above conclusions is now in order. A puzzling result
emerging from Table 6 is that the estimated α1 is always positive (with the exception of
the model in column (6)). At a first thought one would expect this coefficient to be zero or
even negative to reflect the “expected” smaller banks’ dependence on deposits, given the
possibility of access to foreign markets for external funds after 1995. We note however
that the coefficient of deposits is expected to measure the percentage increase of credit
associated to an increase of one percent in deposits. All else equal, if during a given time
period the data exhibit an increase in the credit growth rate larger than the increase in the
deposits growth rate, this will tend to show up in a larger coefficient β1 (i.e., α1 > 0 )
unless due account is taken in the model for this potential “structural break”. But in the
Portuguese case there seems to be a reasonable explanation for the coefficient α1 to be
positive in Table 6. One important feature of the Portuguese aggregate bank data is the
huge decrease of liquidity throughout the sample period. The liquidity ratio decreased
from 37.4 per cent in 1992 to 27 per cent in 1995, to 21 per cent in 1997 and further to
17.1 per cent in 1998. The evolution of the liquidity ratio very much reflects the changes
the banking sector underwent during the nineties. In the beginning of the nineties, the
existence of credit limits forced banks to operate with excess liquidity. After the abolition
of credit limits in 1991 the banks were theoretically free to get rid of that excess liquidity,
but then the exchange rate crisis of 1992 occurred. Only after the economic downturn of
1993-1994 banks were able to finance an increasing demand for credit by selling their
Portuguese government bond holdings to foreign banks. This resulted in a reduction of the
liquidity ratio, which probably explains why banks appear more deposit dependent in the
two last years of the sample (α1 > 0 ) in Table 6. So, in the Portuguese case it may well
be the case that for liquidity reasons bank deposit dependency has increased over time in
36 The bottom row of Table 6 reports the t-statistics for the restriction (β5+α5)+(β7+α7)=0 , which
is the spread condition for the period 1996/1-1997/4.
34