Working Paper: NBER ID: w31171
Authors: Stefano Federico; Giuseppe Marinelli; Francesco Palazzo
Abstract: We study how a demand shock in an export market propagates to the exporting country’s banking system. Using the dual shocks of sanctions and falling oil prices suffered by Russia in 2014, we investigate the effects on Italian firms and banks more exposed to the Russian market. This event implied a sharp decline in sales for firms with a significant share of sales to Russia, but it did not affect the overall amount of credit available to them. Banks relatively more exposed to Italian exporters to Russia cut their overall credit supply, especially vis-à-vis ex ante risky borrowers, but continued to provide credit towards firms moderately hit by the trade shock, in an attempt to let them cope with the liquidity shortfall. Our results suggest that banks mitigate trade shocks for certain hit firms, while at the same time propagate them to other firms not directly affected by the shock.
Keywords: Russia shock; Italian firms; credit supply; banking system; export market
JEL Codes: F10; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decline in revenues for firms (D22) | decrease in sales (L81) |
| increase in drawn credit (E51) | negative spillover effect (D62) |
| risk of insolvency among exporters to Russia (G33) | banks tighten credit to other risky firms (G21) |
| banks provide more credit to firms with moderate exposure to Russia (G21) | manage risk while supporting viable businesses (G33) |
| 2014 Russia shock (F69) | decline in revenues for firms (D22) |
| 2014 Russia shock (F69) | increase in drawn credit (E51) |
| banks more exposed to hit borrowers (G21) | reduced credit supply to other borrowers (E51) |
| hit borrowers (G21) | non-hit borrowers (G51) |