Lending Channels and Financial Shocks: The Case of Small and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis

We offer a new paradigm for understanding the impact of financial shocks on the flow of credit to small and medium-sized enterprises (SMEs). Drawing from research on the lending view of monetary policy and research on SME financial contracting, we introduce the concept of "lending channels." A lending channel is a two-dimensional conduit through which SMEs obtain financing. In particular, a lending channel consists of a specific lending technology provided by a specific type of institution. We hypothesize that during financial shocks some lending channels may close and other channels may expand to absorb the slack. We empirically test a possible implication of this hypothesis by examining whether one lending channel, trade credit, played a significant role as a substitute for other lending channels in offsetting a contraction in SME lending of other lending channels during the Japanese financial crisis. We find little evidence that trade credit played such a role. To the contrary, we find some evidence that trade credit and financial institution lending are complements, rather than substitutes, during the Japanese financial crisis periods. This does not preclude the possibility that other lending channels may have behaved in a manner consistent with this hypothesis.