Bank default risk propagation along supply chains: evidence from the UK

Ali Kabiri, Vlad Malone, Isabelle Angeline Madeleine Roland and Mariana Spatareanu

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: How does banks’ default risk affect the probability of default of non-financial businesses? The literature has addressed this question by focusing on the direct effects on the banks’ corporate customers – demonstrating the existence of bank-induced increases in firms’ probabilities of default. However, it fails to consider the indirect effects through the interfirm transmission of default risk along supply chains. Supply chain relationships have been shown to be a powerful channel for default risk contagion. Therefore, the literature might severely underestimate the overall impact of bank shocks on default risk in the business economy. Our paper fills this gap by analyzing the direct as well as the indirect impact of banks’ default risk on firms’ default risk in the U.K. Relying on Input-Output tables, we devise methods that enable us to examine this question in the absence of microeconomic data on supply chain links. To capture all potential propagation channels, we account for horizontal linkages between the firm and its competitors in the same industry, and for vertical linkages, both between the firm and its suppliers in upstream industries and between the firm and its customers in downstream industries. In addition, we identify trade credit and contract specificity as significant characteristics of supply chains, which can either amplify or dampen the propagation of default risk. Our results show that the banking crisis of 2007-2008 affected the non-financial business sector well beyond the direct impact of banks’ default risk on their corporate clients.

Keywords: default risk; propagation of banking crises; supply chains (search for similar items in EconPapers)
JEL-codes: G21 G34 O16 O30 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020-06-12
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/121832/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:121832

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().