Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries

Abstract

Abstract:While theory predicts different effects of household credit and enterprise credit on the economy, the empirical literature has mainly used aggregate measures of overall bank lending to the private sector. We construct a new dataset from 45 developed and developing countries, decomposing bank lending into lending to enterprises and lending to households and assess the different effects of these two components on real sector outcomes. We find that: 1) enterprise credit raises economic growth whereas household credit has no effect; 2) enterprise credit reduces income inequality whereas household credit has no effect; and 3) household credit is negatively associated with excess consumption sensitivity, while there is no relationship between enterprise credit and excess consumption sensitivity. JEL Codes: D14; G21; G28

Finance and employment*

“…Beck, Levine and Levkov (2010) show that branch deregulation in the 1970s and 1980s across the U.S. led to lower cost of capital, but labour demand also increased, with the additional demand falling mostly on low-skilled workers whose wages and hours worked increased and therefore their wage income, with the ultimate result of tightening income distribution. The finding by Beck et al (2009) is also consistent with the authors' finding that 'evidence suggests that financial development allows firms to expand output by raising their use of both labour and capital, rather than shifting to more capital-intensive technologies and thereby prompting an increase in labour productivity and wages'.…”

“…One reason why financial deepening is not related to employment growth in high-income countries might be that the more recent financial deepening in these countries has been driven by household rather than enterprise credit for which we would expect less if any effect on labour markets (Beck et al, 2009). Also, as pointed out by many observers after the onset of the recent financial crisis, financial sector deepening in high-income countries in the early years of the 21st century has been related to non-lending activities, including increased trading and investment banking activities, rather than traditional lending activities.…”

The On-Going Price of Perceiving Money as a Veil

“…Most of this financial deepening (Note 16) in wealthy nations has come through additional household lending, as opposed to enterprise credit. Data from 45 countries (1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005) indicates enterprise credit is positively correlated with real economic expansion but no such link exists between economic growth and household credit (Beck, Büyükkarabacak, Rioja, & Valev, 2012). In advanced economies, which have intense financial development, more financing is correlated with diminishing economic growth (Arcand et al, 2012).…”

Lending, Investments and the Financial Crisis

“…However, Beck et al (2008a) show that for a large group of countries, in the period 1994-2005, the decomposition of loan portfolio was important when analysing impact on growth. A study of factors stimulating economic growth carried out by Beck et al (2008b) points up the significant role of bank lending, but that concerning entrepreneurs rather than consumers. Also a recent paper by Beck et al (2014) points to the fact that loan accessibility should be analysed not in total, but separately for consumer and entrepreneurial (investment) purposes, with only the latter contributing significantly to economic growth.…”