The Real Side of the Financial Crisis: Banks' Exposure, Flight to Quality and Firms' Investment Rate

Emanuele Brancati

No 302, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: The paper takes advantage of the Italian experience in the Lehman crisis to test the effects of banking shocks on the real decisions of client firms. The analysis exploits plant-level data and models the magnitude of the shock with banks' pre-crisis holding of Dollar-denominated assets and liabilities. After controlling for demand conditions I document the existence of a bank-lending channel affecting the investment rate, the amount of borrowing, and the probability of financial constraints of client firms. This transmission mechanism is characterized by a flight to quality away from risky borrowers, with stronger effects for undercapitalized and illiquid banks or financial institutions that depend more upon bank-based sources of finance.

Keywords: Financial crises; banks; lending; investment; flight to quality; financial constraints (search for similar items in EconPapers)
JEL-codes: E22 G01 G21 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2013-12-18, Revised 2014-03-20
New Economics Papers: this item is included in nep-ban and nep-mac
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