Analysis of Banks' Credit Standards and Lending Decisions

This technical report presents an analysis of how banks determine their credit standards when lending to firms, focusing on the relationship between banks' financial health and the characteristics of their borrowers. The study builds a unique dataset by linking confidential bank-level information from the euro area bank lending survey with firm-level data, covering the period from 2008 to 2020. The findings indicate that weaker capitalized banks are more likely to adjust their credit standards in response to macroeconomic changes, such as increases in funding costs and deteriorations in corporate loan portfolios. Specifically, these banks tighten their credit standards more than healthier banks, particularly when lending to firms with higher default risks. The report emphasizes the importance of understanding the dynamics of credit supply in a bank-based financial system, especially in light of recent economic shocks, including the COVID-19 pandemic. It also discusses the implications for monetary policy and the role of fiscal support in stabilizing the banking sector during economic downturns.