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Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises

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  • Pierluigi Balduzzi
  • Emanuele Brancati
  • Fabio Schiantarelli

Abstract

We test whether adverse changes to banks’ market valuations during the financial and sovereign debt crises, and the associated increase in banks’ cost of funding, affected firms’ real decisions. Using new data linking over 3,000 non-financial Italian firms to their bank(s), we find that increases in banks’ CDS spreads, and decreases in their equity valuations, resulted in lower investment, employment, and bank debt for younger and smaller firms. Importantly, these effects dominate those of banks’ balance-sheet variables. We also show that higher CDS spreads led to lower aggregate investment, employment, and a less efficient resource allocation.

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  • Pierluigi Balduzzi & Emanuele Brancati & Fabio Schiantarelli, 2015. "Financial Markets, Banks' Cost of Funding, and Firms' Decisions: Lessons from Two Crises," CESifo Working Paper Series 5669, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5669
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    Cited by:

    1. Raffaele Santioni & Fabio Schiantarelli & Philip E. Strahan, 2017. "Internal Capital Markets in Times of Crisis: The Benefit of Group Affiliation in Italy," NBER Working Papers 23541, National Bureau of Economic Research, Inc.
    2. Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2017. "Bank quality, judicial efficiency and borrower runs: loan repayment delays in Italy," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Uses of central balance sheet data offices' information, volume 45 Bank for International Settlements.
    3. Ryan Banerjee & Enrico Sette & Leonardo Gambacorta, 2017. "The real effects of relationship lending," Temi di discussione (Economic working papers) 1133, Bank of Italy, Economic Research and International Relations Area.
    4. De Marco, Filippo & Wieladek, Tomasz, 2015. "The real effects of capital requirements and monetary policy: evidence from the United Kingdom," Bank of England working papers 573, Bank of England.
    5. Antonio De Socio & Enrico Sette, 2018. "Firms’ investments during two crises," Temi di discussione (Economic working papers) 1173, Bank of Italy, Economic Research and International Relations Area.
    6. Filippo De Marco, 2017. "Bank Lending and the European Sovereign Debt Crisis," Working Papers 213, Oesterreichische Nationalbank (Austrian Central Bank).
    7. Gómez, Miguel García-Posada, 2018. "Credit constraints, firm investment and growth: evidence from survey data," Working Paper Series 2126, European Central Bank.
    8. Holton, Sarah & McCann, Fergal, 2016. "Sources of the small firm financing premium: Evidence from euro area banks," Research Technical Papers 09/RT/16, Central Bank of Ireland.
    9. Acharya, Viral V & Eisert, Tim & Eufinger, Christian & Hirsch, Christian, 2014. "Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans," CEPR Discussion Papers 10108, C.E.P.R. Discussion Papers.
    10. Berg, Tobias, 2016. "Got rejected? Real effects of not getting a loan," Working Paper Series 1960, European Central Bank.
    11. Miguel García-Posada Gómez, 2018. "Credit constraints, firms investment and growth evidence from survey data," Working Papers 1808, Banco de España;Working Papers Homepage.
    12. repec:erc:cypepr:v:11:y:2017:i:2:p:19-62 is not listed on IDEAS

    More about this item

    Keywords

    financial crisis; sovereign debt crisis; credit default swaps; investment; employment;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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