Credit supply preserved after distressed bank acquisitions
A BIS working paper finds that acquiring banks in sale-of-business resolutions preserve credit to riskier inherited borrowers. This stabilization occurs despite tighter capital conditions, achieved through strategic credit reallocation within their portfolios.
Acquirers shield risky borrowers
The study provides the first micro-level evidence on how sale-of-business (SoB) bank resolutions reshape credit allocation, focusing on the 2017 resolution of Spain's Banco Popular.
It reveals that the acquiring bank, Banco Santander, preserved lending relationships, prioritizing support for riskier inherited borrowers.
These borrowers were most exposed to retrenchment by competing banks, which cut credit to risky failed-bank borrowers by around 5 percent.
The paper highlights that this support for inherited clients was crucial in limiting disruptions to the real economy, as total credit to failed-bank borrowers was broadly maintained, and real outcomes like investment and employment were largely insulated for riskier inherited firms.
Strategic reallocation under capital strain
The acquiring bank achieved this stabilization despite facing tighter capital conditions following the acquisition, which temporarily reduced its Core Tier 1 (CET1) ratio.
The research indicates a targeted reallocation of credit within the acquiring bank's broader portfolio.
It strategically shifted away from more capital-intensive exposures within its pre-existing loan book while preserving and even strengthening lending to riskier inherited borrowers.
This behavior is consistent with incentives to preserve the value of the newly acquired lending franchise and demonstrates how capital constraints can shape internal credit allocation during bank resolutions, preventing a generalized contraction in lending.
A conditional success story
The findings suggest the sale-of-business tool can effectively limit real economy disruptions, but its success hinges on the acquirer's strategic alignment and capital capacity.
While the tool prevents public bailouts, it introduces complex credit reallocation dynamics that require careful monitoring.
For policymakers, this implies that resolution frameworks must consider the acquiring bank's incentives and balance sheet strength to ensure financial stability.