Sorting out the effect of credit supply

Briana Chang, Matthieu Gomez and Harrison Hong

Journal of Financial Economics, 2023, vol. 150, issue 3

Abstract: We document that banks that cut lending more during the Great Recession were lending to riskier firms ex-ante. To understand the aggregate implications of this sorting pattern, we build an assignment model in which banks have heterogeneous costs to take on risky loans and firms have different credit risks. In the model, aggregate loan volume depends on the entire distribution of bank holding costs and firm credit risks. We then use our model to recover the change in the distribution of bank holding costs during the Great Recession and show that it explains two-thirds of the decline of aggregate loan volume during this period.

Keywords: Banking; Sorting; Great recession (search for similar items in EconPapers)
JEL-codes: G0 G2 G21 G23 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:150:y:2023:i:3:s0304405x23001599

DOI: 10.1016/j.jfineco.2023.103719

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