Banks' Credit Losses and Lending Dynamics

Using detailed data of all German banks, we find that banks which have suffered heavy credit losses reduce their corporate lending business by 1.32 euro for each lost; with 95% confidence, the effect is between 0.85 and 1.80 euros. This sensitivity in line (quite heterogeneous) results earlier studies but significantly lower than those arising from assumption constant leverage. Weakly capitalized grant fewer new loans other banks. We control demand using a method, construction tailored hypothetical bank competitors.