The bank lending channel during financial turmoil

This paper uses a natural experiment to study the impact of a loan supply shock on a Hungarian matched bank-firm dataset. The event studied is a funding shock Hungarian banks faced following the collapse of the Lehman Brothers. Banks were affected via their external funding and positions on the swap market. The existence of firms with multiple bank links is utilized to separate demand and supply, and to find instruments to calculate the impact of the supply shock on lending and firms’ real outcome. According to the results banks with large exposure on the swap market and with heavy reliance on foreign market funding cut their lending more, while foreign group funding provided a buffer. Firms were not able to fully offset the impact of the supply shock by shifting to less exposed banks, their overall lending fell too. The supply shock affected various groups of firms differently: banks reallocated lending towards larger firms. The squeeze on lending in turn had an impact on firms’ real performance, by lowering their net investment. The real impact was more detrimental for small and risky firms.