From financial to real economic crisis: evidence from individual firm¨Cbank relationships in Germany

Nadja Dwenger, Frank Fossen and Martin Simmler ()
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Martin Simmler: Oxford University Centre for Business Taxation and DIW Berlin

No 1516, Working Papers from Oxford University Centre for Business Taxation

Abstract: What began as a financial crisis in the United States in 2007¨C2008 quickly evolved into a massive crisis of the global real economy. We investigate the importance of the bank lending and firm borrowing channel in the international transmission of bank distress to the real economy ¡ªin particular, to real investment and labour employment by nonfinancial firms. We analyse whether and to what extent firms are able to compensate for the shortage in loan supply by switching banks and by using other types of financing. The analysis is based on a unique matched data set for Germany that contains firm-level financial statements for the 2004¨C2010 period together with the financial statements of each firm¡¯s relationship bank(s). We use instrumental variable estimations in first differences to eliminate firm and bank-specific effects. The first stage results show that banks that suffered losses due to proprietary trading activities at the onset of the financial crisis reduced their lending more strongly than non-affected banks. In the second stage, we find that firms whose relationship banks reduce credit supply downsize their real investment and labour employment significantly. This effect is larger for firms that are unable to provide much collateral. We document that firms partially offset reduced credit supply by establishing new bank relationships, using internal funds, and issuing new equity.

Keywords: financial crisis; contagion; credit rationing; relationship lending; investment (search for similar items in EconPapers)
JEL-codes: D22 D92 E44 G01 G20 G31 H25 H32 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-eec and nep-mac
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Citations: View citations in EconPapers (7)

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