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Credit Shock Propagation in Firm Networks: evidence from government bank credit expansions

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  • Gustavo S. Cortes
  • Thiago Christiano Silva
  • Bernardus F. N. Van Doornik

Abstract

We study how bank credit shocks propagate through supplier-customer firm networks. We do so using administrative data that covers firm-to-firm transactions in Brazil around the debacle of Lehman Brothers. Using the counter-cyclical reaction of government-owned banks in Brazil after Lehman's failure as a policy experiment, we show that credit shocks originated in bank-firm relationships are transmitted throughout the network of suppliers and customers, with measurable consequences for firms' real outcomes and survival probability. A firm with direct and indirect access to government credit (through its customers or suppliers) observed a 12.5% greater survival probability, vis-à-vis 4% when the firm has only direct access. Critically, we uncover drawbacks of these interventions, including a persistent increased concentration in the market share of firms that benefited from government liquidity.

Suggested Citation

  • Gustavo S. Cortes & Thiago Christiano Silva & Bernardus F. N. Van Doornik, 2019. "Credit Shock Propagation in Firm Networks: evidence from government bank credit expansions," Working Papers Series 507, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:507
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    3. Thiago Christiano Silva & Fabiano José Muniz & Benjamin Miranda Tabak, 2022. "Indirect and direct effects of the subprime crisis on the real sector: labor market migration," Empirical Economics, Springer, vol. 62(3), pages 1407-1438, March.
    4. Peydró, José-Luis & Jiménez, Gabriel & Kenan, Huremovic & Moral-Benito, Enrique & Vega-Redondo, Fernando, 2020. "Production and financial networks in interplay: Crisis evidence from supplier-customer and credit registers," CEPR Discussion Papers 15277, C.E.P.R. Discussion Papers.
    5. Mauricio Medeiros Jr & Bernardus Van Doornik, 2021. "Human Capital and Startup Financing," Working Papers Series 546, Central Bank of Brazil, Research Department.
    6. Florian Unger, 2021. "Credit frictions, selection into external finance and gains from trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1206-1251, November.
    7. Norden, Lars & Mesquita, Daniel & Wang, Weichao, 2021. "COVID-19, policy interventions and credit: The Brazilian experience," Journal of Financial Intermediation, Elsevier, vol. 48(C).

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