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The banks that said no: banking relationships, credit supply and productivity in the United Kingdom

Author

Listed:
  • Franklin, Jeremy

    () (Bank of England)

  • Rostom, May

    () (Bank of England)

  • Thwaites, Gregory

    () (Bank of England)

Abstract

This paper uses a large firm-level data set of UK companies and information on their pre-crisis lending relationships to identify the causal links from changes in credit supply to the real economy following the 2008 financial crisis. Controlling for demand in the product market, we find that the contraction in credit supply reduced labour productivity, wages and the capital intensity of production at the firm level. Firms experiencing adverse credit shocks were also more likely to fail, other things equal. We find that these effects are robust, statistically significant and economically large, but only when instruments based on pre-crisis banking relationships are used. We show that banking relationships were conditionally randomly assigned and were strong predictors of credit supply, such that any bias in our estimates is likely to be small.

Suggested Citation

  • Franklin, Jeremy & Rostom, May & Thwaites, Gregory, 2015. "The banks that said no: banking relationships, credit supply and productivity in the United Kingdom," Bank of England working papers 557, Bank of England.
  • Handle: RePEc:boe:boeewp:0557
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2015/the-banks-that-said-no-banking-relationships-credit-supply-and-productivity-in-the-uk.pdf?la=en&hash=20F2443F479FB955F7CBB94390FD54F98A41275F
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    References listed on IDEAS

    as
    1. Arrowsmith, Martin & Griffiths, Martin & Franklin, Jeremy & Wohlmann, Evan & Young, Garry & Gregory, David, 2013. "SME forbearance and its implications for monetary and financial stability," Bank of England Quarterly Bulletin, Bank of England, vol. 53(4), pages 296-303.
    2. Barnett, Alina & Batten, Sandra & Chiu, Adrian & Franklin, Jeremy & Sebastia-Barriel, Maria, 2014. "The UK productivity puzzle," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 114-128.
    3. Alina Barnett & Ben Broadbent & Adrian Chiu & Jeremy Franklin & Helen Miller, 2014. "Impaired Capital Reallocation and Productivity," National Institute Economic Review, National Institute of Economic and Social Research, vol. 228(1), pages 35-48, May.
    4. Ongena, Steven & Peydró, José-Luis & Horen, Neeltje van, 2015. "Shocks Abroad, Pain at Home? Bank-Firm Level Evidence on the International Transmission of Financial Shocks," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 698-750.
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    7. Samuel Bentolila & Marcel Jansen & Gabriel Jiménez, 2018. "When Credit Dries Up: Job Losses in the Great Recession," Journal of the European Economic Association, European Economic Association, vol. 16(3), pages 650-695.
    8. Daniel Paravisini & Veronica Rappoport & Philipp Schnabl & Daniel Wolfenzon, 2015. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 333-359.
    9. Andrew K. Rose & Tomasz Wieladek, 2014. "Financial Protectionism? First Evidence," Journal of Finance, American Finance Association, vol. 69(5), pages 2127-2149, October.
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    12. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
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    15. repec:dgr:kubcen:2013040 is not listed on IDEAS
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    17. Samuel Bentolila & Marcel Jansen & Gabriel Jiménez & Sonia Ruano, 2013. "When Credit Dries Up: Job Losses in the Great Recession," CESifo Working Paper Series 4528, CESifo.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Besley, T. & Roland, I. & Van Reenen, J., 2019. "The Aggregate Consequences of Default Risk: Evidence from Firm-level Data," Cambridge Working Papers in Economics 2061, Faculty of Economics, University of Cambridge.
    2. de Ridder, Maarten, 2016. "Investment in productivity and the long-run effect of financial crises on output," LSE Research Online Documents on Economics 86180, London School of Economics and Political Science, LSE Library.
    3. Clymo, AJ, 2017. "Heterogeneous Firms, Wages, and the Effects of Financial Crises," Economics Discussion Papers 20572, University of Essex, Department of Economics.
    4. Doerr, Sebastian & Raissi, Mehdi & Weber, Anke, 2018. "Credit-supply shocks and firm productivity in Italy," Journal of International Money and Finance, Elsevier, vol. 87(C), pages 155-171.
    5. Driver, Ciaran & Muñoz-Bugarin, Jair, 2019. "Financial constraints on investment: Effects of firm size and the financial crisis," Research in International Business and Finance, Elsevier, vol. 47(C), pages 441-457.
    6. Millard, Stephen & Nicolae, Anamaria & Nower, Michael, 2019. "International trade, non-trading firms and their impact on labour productivity," Bank of England working papers 787, Bank of England.
    7. Degryse, Hans & Matthews, Kent & Zhao, Tianshu, 2018. "SMEs and access to bank credit: Evidence on the regional propagation of the financial crisis in the UK," Journal of Financial Stability, Elsevier, vol. 38(C), pages 53-70.
    8. Lychakov, Nikita, 2019. "From financial crisis to revolution: Russia 1899-1905," MPRA Paper 95166, University Library of Munich, Germany.
    9. Anderson, Gareth & Riley, Rebecca & Young, Garry, 2019. "Distressed banks, distorted decisions?," LSE Research Online Documents on Economics 100947, London School of Economics and Political Science, LSE Library.
    10. Michal Brzozowski, 2019. "Access to Credit and Growth of Firms," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(3), pages 253-274, June.
    11. Berger, Allen N. & Molyneux, Phil & Wilson, John O.S., 2020. "Banks and the real economy: An assessment of the research," Journal of Corporate Finance, Elsevier, vol. 62(C).
    12. repec:cep:cepisp:05 is not listed on IDEAS
    13. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," BIS Working Papers 711, Bank for International Settlements.
    14. Francesco Manaresi & Nicola Pierri, 2019. "Credit Supply and Productivity Growth," IMF Working Papers 19/107, International Monetary Fund.
    15. Richard Disney & Helen Miller & Thomas Pope, 2018. "Firm-level investment spikes and aggregate investment over the Great Recession," IFS Working Papers W18/03, Institute for Fiscal Studies.
    16. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," Temi di discussione (Economic working papers) 1168, Bank of Italy, Economic Research and International Relations Area.
    17. Spatareanu, Mariana & Manole, Vlad & Kabiri, Ali, 2019. "Do bank liquidity shocks hamper firms’ innovation?," International Journal of Industrial Organization, Elsevier, vol. 67(C).

    More about this item

    Keywords

    Credit shock; financial frictions; productivity puzzle; firm-level data;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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