Interest rate cuts by the Bank of Israel in 2008-2015 were particularly helpful to companies suffering from a credit crunch by enabling them to substantially increase their bank credit, according to a study published today by the Bank of Israel.
The Bank of Israel states that its interest rate cuts prevented the global credit crisis from causing a steep decline in the volume of business credit, which has been largely unchanged in recent years.
The study, conducted by Gilad Cohen Kovacs from the Bank of Israel Research Department, analyzed the effect of the interest rate cuts on 200 companies listed on the Tel Aviv Stock Exchange (TASE). The study focused on the effect of the interest rate on business credit through the companies' balance sheet channel, which is one of the ways that monetary policy affects the supply of credit for business companies, and thereby affects economic activity. According to this theory, cutting the interest rate increases companies' market cap, thereby reducing the risk of banks and other financial concerns in lending money to those companies and increasing the supply of credit to them.
In 2008-2015, the Bank of Israel made a series of interest rate cuts, some of them unexpected, that reduced the interest rate from just under 4% to an all-time low of 0.1% in March 2015, where it has remained ever since.
The study found that the reduction in the interest rate cumulatively increased the companies' market cap by 7-8%. In extreme cases, companies' market cap rose by 20%. The growth in market cap varied according to a company's sensitivity to a change in the interest rate. For example, an interest rate change has less effect on demand for food than on the demand for housing.
In the second stage, the study examined the effect of the change in market cap on the volume of business credit granted to firms. The study found that the greatest beneficiaries were companies suffering from a lack of credit. "It can be stated with caution that the steep 3.75% cut in the interest rate led to a 9-18% increase in total credit to companies facing financially constraints," Cohen Kovacs writes.
Companies facing financial constraints accounted for 15% of all the public companies examined in the study. It can be stated with near certainty that the proportion of private companies facing financial constraints is even higher than 15%, because on the average, public companies have more credit options.
Published by Globes [online], Israel Business News - www.globes-online.com - on August 9, 2017
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