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Sorting Out the Real Effects of Credit Supply

Author

Listed:
  • 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.

Suggested Citation

  • Briana Chang & Matthieu Gomez & Harrison Hong, 2021. "Sorting Out the Real Effects of Credit Supply," NBER Working Papers 28842, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28842
    Note: CF ME
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    Cited by:

    1. Hoffmann, Mathias & Maslov, Egor & Sørensen, Bent E., 2022. "Small firms and domestic bank dependence in Europe's great recession," Journal of International Economics, Elsevier, vol. 137(C).
    2. Francesco Bripi, 2023. "The impact of credit substitution between banks on investment," Temi di discussione (Economic working papers) 1408, Bank of Italy, Economic Research and International Relations Area.
    3. Altavilla, Carlo & Boucinha, Miguel & Bouscasse, Paul, 2022. "Supply or Demand: What Drives Fluctuations in the Bank Loan Market?," Working Paper Series 2646, European Central Bank.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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