Working Paper: NBER ID: w28842
Authors: Briana Chang; Matthieu Gomez; Harrison Hong
Abstract: We document that banks which cut lending more during the Great Recession were lending to riskier firms. To explain this evidence, we build a competitive matching model of bank-firm relationships in which risky firms borrow from banks with low holding costs. Based on default probabilities and equilibrium loan rates, we use our sorting model to recover the latent bank holding cost distribution. The measure of banks with low holding costs dropped during the Great Recession. This credit supply shift conservatively accounted for around 50% of the decline in corporate loans over this period. Our attribution cannot be captured by panel regression estimates from the bank lending channel literature.
Keywords: credit supply; bank lending; Great Recession; firm risk; securitization
JEL Codes: G00; G01; G20; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banks reduced lending the most during the Great Recession (G21) | those lending to the riskiest firms (G21) |
| higher borrower loan spreads (G51) | decreased bank lending growth (G21) |
| 1 percentage point increase in borrower loan spread (G51) | decrease in lending growth (G21) |
| banks with low holding costs dropped significantly during the recession (G21) | about 50% of the observed decline in corporate loans (G33) |
| distribution of bank holding costs and firm credit risk (G21) | interest rates charged by banks (G21) |
| credit supply shift (E51) | decline in lending (G21) |