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The Impact of Bank Lending Standards on Credit to Firms

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  • Lorenzo Ricci
  • Giovanni Soggia
  • Lorenzo Trimarchi

Abstract

This paper investigates the impact of idiosyncratic shocks in bank lending standards on firm credit in Italy, using survey data from the Regional Bank Lending Survey to identify bank supply conditions. From 2009 to 2019, we document that a one-standard-deviation tightening in lending standards reduces firm credit growth by 0.21 percentage points and explains 4.3% of the total variation. This effect is driven mainly by liquidity provisionsto firms for credit lines. Examining the extensive margin of the bank-firm relationship, we find that a negative shock significantly impacts the probability of accepting new loan applications and the likelihood of the bank-firm relationship breaking up. We also show firms cannot smooth individual bank shocks by borrowing more from other lenders. Changes to lending standards have sizable and persistent effects on aggregatecredit and production, especially at times of high economic uncertainty.

Suggested Citation

  • Lorenzo Ricci & Giovanni Soggia & Lorenzo Trimarchi, 2022. "The Impact of Bank Lending Standards on Credit to Firms," Working Papers ECARES 2022-01, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:eca:wpaper:2013/338083
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    Keywords

    Credit Growth; Bank Lending Standards; Credit Lines;
    All these keywords.

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