Credit Supply: Are there negative spillovers from banks' proprietary trading?

Following the 2008 financial crisis, policy makers considered regulations that restrict banks activities which were motivated by concerns that banks use central bank borrowing, government guarantees, or subsidies to fund securities trading instead of lending to the real economy. Using a global sample of 132 major banks from 2003 to 2016, we find that banks securities trading is indeed associated with decreased loan supply. Effects are stronger for domestic lending markets, during crisis periods, and in countries with deeper financial markets. However, corporate capital expenditures and employment growth are unaffected, suggesting that policy makers concerns are only partly justified.
 
Keywords: Credit Supply, Proprietary Trading, International Lending, Banking, Corporate Loans.
JEL classifications: G01, G21, G28.

Working paper no. 657