Productivity Slowdown and Firm Exit: The Ins and Outs of Banking Crises

This paper studies the adverse long-term impact of declining bank health on aggregate productivity. I develop a simple model of productivity-enhancing investment where firm exposure to fragile banks leads to losses on both the intensive and extensive margins. The model highlights the existence of a bias in measuring observable TFP growth during episodes of heightened firm exits. To address this bias, I construct an exit-adjusted measure of productivity growth using data on Spanish firm-bank relationships and bank bailouts from 2007-2017 and use this measure to quantify the output loss from bank distress. The identification of the exit bias exploits regional variation in weak-bank density. A counterfactual analysis shows that, a decade after the banking crisis, output growth from the extensive margin recovers but the intensive margin proves much more persistent. Together, these dynamics amount to a cumulative loss of 3% of pre-crisis GDP over ten years.