need some other assumption to ensure identification of the loan supply schedule (and also
a different theoretical model to justify including the deposits variable as a regressor in our
supply equation).
On the other hand treating external funds as completely endogenous when the supply
conditions of these funds completely changed during the estimation period with the
possibility of accessing funds from foreign banks, is also probably not a satisfactory
simplification.
Another potential explanation for the results is that our measure of costs of external
funds (the Lisbor interest rate) may not be a good proxy for the true costs of external
funds for banks, which in turn may explain why the “spread condition” is rejected for the
period 1990/1995.
Finally, the changes that the banking sector underwent during the nineties, which
include the alterations of the competitive context with the huge increase in the number of
banks, the re-privatisation process and several merging operations, are also potential
explanations for some of ours somewhat puzzling results.
8. Conclusions
This paper investigates the existence of a bank-lending channel using quarterly data on the
Portuguese banks for the period 1990-1997.
In contrast to previous approaches which basically resort to (dynamic) reduced form
equations for bank credit with variables in differences, this paper proposes an alternative
approach by estimating directly a “structural” loan supply schedule with variables in
levels, thereby exploiting recent cointegration results for nonstationary panel data.
We conclude for the existence of a lending channel in Portuguese data and that the
importance of this channel is larger for the less capitalised banks. Size as well as liquidity
does not appear to be relevant bank characteristics to determine the importance of the
lending channel. However, the existence of a “structural break” during the sample period
reflected by the possibility of Portuguese banks to access external funds from foreign EU
banks suggests that these empirical results should be interpreted cautiously.
References
Alvarez, J. and Arellano, M, (1998), “The time series and cross-section asymptotics of
dynamic panel data estimators”, mimeo;
36