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Regulatory Credit Supply Shocks, Reallocation, And Real Economic Outcomes

Author

Listed:
  • Aishwarya Bhamidipati

    (University of Virginia)

  • Nishant Kashyap

    (Indian Institute of Management Ahmedabad)

  • Vidhya Soundararajan

    (Centre for Advanced Financial Research and Learning (CAFRAL))

  • Prasanna Tantri

    (Indian School of Business)

Abstract

We study how regulatory interventions targeting weak banks affect credit allocation and real economic outcomes. Using staggered bank-level exposure to regulatory restrictions and the universe of collateralized corporate loans matched with firm-level financial data, we identify contractions in bank credit supply. We find that affected banks reduce lending disproportionately to high-risk firms, which subsequently experience persistent declines in sales and investment and are largely unable to substitute toward non-bank financing. In contrast, low-risk firms in exposed industries receive relatively more credit and expand investment and employment. These patterns are consistent with a reallocation of credit and productive resources from high-risk to lowrisk firms and are accompanied by modest improvements in industry-level productivity in more exposed sectors.

Suggested Citation

  • Aishwarya Bhamidipati & Nishant Kashyap & Vidhya Soundararajan & Prasanna Tantri, 2026. "Regulatory Credit Supply Shocks, Reallocation, And Real Economic Outcomes," Working Papers 022276, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022276
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    File URL: https://www.cafral.org.in/sfControl/content/Speech/2242026115210AMBhamidipati%20Kashyap%20Soundararajan%20Tantri%202026.pdf
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    Keywords

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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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