The Role of Banks in the Transmission of Shocks: Micro Evidence from Argentina 1996-1999

We study the reaction of commercial banks to external macroeconomic shocks using panel data from over 120 banks in Argentina for the period 1996-1999. We show that all banks reduce lending when systemic risk increases and that this reaction is driven by credit supply decisions by banks, beyond and above the impact of reduced credit demand or increased regulatory pressure. However, the underlying reasons differ with bank size: while small banks respond primarily to a credit crunch due to a decline in their deposit base, large banks, which benefit from this shift in deposits, tend to substitute away from risky assets such as lending to small firms towards safe assets such as cash and implicitly guaranteed public sector debt. Thus, countercyclical policies to mitigate the credit crunch may be ill advised if not targeted to those institutions whose lending decisions are currently constrained by lack of capital. JEL: E44, E51, G21