The impact of credit substitution between banks on investment

This paper estimates the elasticity of substitution across banks using matched bank-firm data and assuming monopolistic competition in local credit markets. It also quantifies the impact of credit supply shocks on corporate investment as shaped by this elasticity. Credit supply shocks have significant effects on firms’ investments in industries with a lower degree of substitutability. In these industries, where firms find it difficult to acquire funding and obtain better credit conditions from other banks, a 1 per cent increase in credit supply increases firms’ investment rates by 0.2 per cent. The effect of lenders substitutability on investment offsets that of bank specialization, thus highlighting that the risks of excessive bank concentration in specific industries may be alleviated by lenders substitution. Overall, the evidence suggests that considering the demand side, i.e. the heterogeneous effects of the elasticity of substitution in credit markets, is crucial for a better understanding of the bank lending channel.