Credit supply in the wake of distressed bank acquisitions
Summary
Focus
This paper explores how lending is impacted when a failing bank is acquired by another institution. It focuses on the case of Banco Popular, a major Spanish bank that collapsed in 2017 and was resolved under Europe's new post-Great Financial Crisis framework for managing bank failures. The central question it addresses is: how did this acquisition influence loans to businesses?
Contribution
The failure of large banks can disrupt lending and harm the economy. After the Great Financial Crisis, new tools were introduced to manage such failures without using public funds. However, little is known about how these tools affect lending to businesses. By studying this event, we provide the first detailed evidence of how the sale of business tool can stabilise lending. This research helps policymakers understand how such resolutions can protect the economy and the factors that make them successful.
Findings
The results show that selling a failing bank to another bank can stabilise lending to the failed bank's borrowers. However, the analysis further highlights how the success of this approach depends on the acquiring bank's financial strength and strategy. If the buyer is well capitalised and focused on preserving customer relationships, a sale of business bank resolution can limit the economic impact of a bank failure. This highlights the importance of having strong banks and effective resolution tools to manage crises without relying on public funds.
Abstract
This paper examines the credit supply effects of sale-of-business (SoB) bank resolutions under the post-Global Financial Crisis regulatory framework, focusing on the resolution of a major Spanish bank. We provide the first micro-level evidence of how an SoB resolution reshapes credit allocation. The acquiring bank preserved lending relationships, prioritizing support for riskier inherited borrowers most exposed to competing banks' retrenchment. This stabilization was achieved despite tighter capital conditions, as the acquiring bank strategically reallocated credit within its broader portfolio, shifting away from more capital-intensive exposures. By preserving credit and real outcomes for inherited borrowers, the SoB resolution demonstrates the potential of this tool to limit disruptions to the real economy, contingent on the acquirer's strategic alignment and capital capacity. Our results highlight the interplay between franchise-preservation incentives and capital constraints in shaping credit reallocation during bank resolutions.
JEL classification: G01, G21, G28, G32
Keywords: bank resolution, resolution tools, sale of business tool, credit supply
