The recent slowdown in bank lending in Spain : are supply-side factors relevant?

Using information from the balance sheets of Spanish banks between 1995 and 2009 matched to credit information at the bank-industry and bank-firm level, we estimate the average impact of current and anticipated changes in banks' capital on lending to firms. We isolate the role of credit supply factors using the variation in capital growth associated with the bank-specific historical exposure to real estate development and its interaction with the change in house prices in the provinces where the banks operate. We control for the quality of borrowers by using region and industry fixed effects. A 1 % increase in capital growth increases business lending to non-real estate firms by between 0.7 and 0.8 %-a limited magnitude when set against the literature. The relatively small magnitude of credit supply factors may be explained by the weakness of loan demand in a context of deep recession.