Has the Financial Crisis Undermined Credit Reallocation in the United Kingdom?

The global financial crisis and its aftermath heightened awareness of the role of credit frictions in affecting aggregate economic performance. An important question is whether capital is being allocated to its most productive uses. This paper examines the process through which credit is reallocated across surviving UK businesses over 2004-2012 using the methodology developed by Davis and Haltiwanger (1992) for the analysis of job reallocation. We find that credit reallocation among survivors is intense, and that it primarily occurs across firms similar in size, industry, or location. The results suggest that the aftermath of the global financial crisis has been characterized by persistently increased levels of credit reallocation. However, the evolution of the intensity of credit reallocation after the crisis varies greatly by firm size as measured by sales, with firms in the middle of the distribution driving the overall elevated levels of reallocation in the post-crisis period. When focusing on the sub-sample of larger firms we use to examine the efficiency of the reallocation process, reallocation flows appear to have decreased to levels lower than pre-crisis after a sharp increase in 2007-2008. In terms of efficiency developments, we find that the productivity slowdown of 2008-2009 does not coincide with a deterioration of allocative efficiency along three crucial dimensions of firm performance, namely TFP, labour productivity, and default risk. However, the credit crunch of 2008-2009 coincides with a slowdown of year-on-year efficiency improvements, which persists until the end of the sample period. This raises the prospect that the financial crisis might have undermined the ability of lenders to channel credit to its most productive uses.