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Credit supply during a sovereign debt crisis

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  • Marcello Bofondi

    ()
    (Bank of Italy)

  • Luisa Carpinelli

    ()
    (Bank of Italy)

  • Enrico Sette

    ()
    (Bank of Italy)

Abstract

We study the effect of the increase in Italian sovereign debt risk on credit supply on a sample of 670,000 bank-firm relationships between December 2010 and December 2011, drawn from the Italian Central Credit Register. To identify a causal link, we exploit the lower impact of sovereign risk on foreign banks operating in Italy than on domestic banks. We study firms borrowing from at least two banks and include firm x period fixed effects in all regressions to controlling for unobserved firm heterogeneity. We find that Italian banks tightened credit supply: the lending of Italian banks grew by about 3 percentage points less than that of foreign banks, and their interest rates were 15-20 basis points higher, after the outbreak of the sovereign debt crisis. We test robustness by splitting foreign banks into branches and subsidiaries, and then examine whether selected bank characteristics may have amplified or mitigated the impact. We also study the extensive margin of credit, analyzing banks' propensity to terminate existing relationships and to grant new loan applications. Finally, we test whether firms were able to compensate for the reduction of credit from Italian banks by borrowing more from foreign banks. We find that this was not the case, so that the sovereign crisis had an aggregate impact on credit supply.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 909.

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Date of creation: Apr 2013
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Handle: RePEc:bdi:wptemi:td_909_13

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Keywords: credit supply; sovereign debt crisis; bank lending channel;

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References

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  1. Arteta, Carlos & Hale, Galina, 2008. "Sovereign debt crises and credit to the private sector," Journal of International Economics, Elsevier, vol. 74(1), pages 53-69, January.
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  9. Ugo Albertazzi & Tiziano Ropele & Gabriele Sene & Federico M. Signoretti, 2012. "The impact of the sovereign debt crisis on the activity of Italian banks," Questioni di Economia e Finanza (Occasional Papers) 133, Bank of Italy, Economic Research and International Relations Area.
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  15. Emilia Bonaccorsi di Patti & Enrico Sette, 2012. "Bank balance sheets and the transmission of financial shocks to borrowers: evidence from the 2007-2008 crisis," Temi di discussione (Economic working papers) 848, Bank of Italy, Economic Research and International Relations Area.
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Citations

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Cited by:
  1. Pierluigi Balduzzi & Emanuele Brancati & Fabio Schiantarelli, 2013. "Financial Markets, Banks' Cost of Funding, and Firms' Real Decisions: Lessons from Two Crises," Boston College Working Papers in Economics 824, Boston College Department of Economics, revised 29 Apr 2014.
  2. Balduzzi, Pierluigi & Brancati, Emanuele & Schiantarelli, Fabio, 2013. "Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises," IZA Discussion Papers 7872, Institute for the Study of Labor (IZA).
  3. Emanuele Brancati, 2013. "The Real Side of the Financial Crisis: Banks' Exposure, Flight to Quality and Firms' Investment Rate," CEIS Research Paper 302, Tor Vergata University, CEIS, revised 18 Dec 2013.
  4. Correa, Ricardo & Sapriza, Horacio, 2014. "Sovereign Debt Crises," International Finance Discussion Papers 1104, Board of Governors of the Federal Reserve System (U.S.).
  5. Tümer Kapan & Camelia Minoiu, 2013. "Balance Sheet Strength and Bank Lending During the Global Financial Crisis," IMF Working Papers 13/102, International Monetary Fund.
  6. Affinito, Massimiliano, 2013. "Central bank refinancing, interbank markets and the hypothesis of liquidity hoarding: evidence from a euro-area banking system," Working Paper Series 1607, European Central Bank.
  7. Massimiliano Affinito, 2013. "Central bank refinancing, interbank markets, and the hypothesis of liquidity hoarding: evidence from a euro-area banking system," Temi di discussione (Economic working papers) 928, Bank of Italy, Economic Research and International Relations Area.
  8. Paolo Angelini & Giuseppe Grande & Fabio Panetta, 2014. "The negative feedback loop between banks and sovereigns," Questioni di Economia e Finanza (Occasional Papers) 213, Bank of Italy, Economic Research and International Relations Area.
  9. Paolo Del Giovane & Andrea Nobili & Federico Maria Signoretti, 2013. "Supply tightening or lack of demand? An analysis of credit developments during the Lehman Brothers and the sovereign debt crises," Temi di discussione (Economic working papers) 942, Bank of Italy, Economic Research and International Relations Area.
  10. Ugo Albertazzi & Margherita Bottero, 2013. "The procyclicality of foreign bank lending: evidence from the global financial crisis," Temi di discussione (Economic working papers) 926, Bank of Italy, Economic Research and International Relations Area.
  11. Fulli-Lemaire, Nicolas, 2013. "A Tale of Two Eurozones: Banks’s Funding, Sovereign Risk & Unconventional Monetary Policies," MPRA Paper 49072, University Library of Munich, Germany.

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