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Credit Shock Propagation in Firm Networks: evidence from government bank credit expansions

Gustavo Cortes, Thiago Silva () and Bernardus Van Doornik ()

No 507, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: We study how bank credit shocks propagate through supplier-customer firm networks. We do so using administrative data that covers firm-to-firm transactions in Brazil around the debacle of Lehman Brothers. Using the counter-cyclical reaction of government-owned banks in Brazil after Lehman's failure as a policy experiment, we show that credit shocks originated in bank-firm relationships are transmitted throughout the network of suppliers and customers, with measurable consequences for firms' real outcomes and survival probability. A firm with direct and indirect access to government credit (through its customers or suppliers) observed a 12.5% greater survival probability, vis-à-vis 4% when the firm has only direct access. Critically, we uncover drawbacks of these interventions, including a persistent increased concentration in the market share of firms that benefited from government liquidity.

Date: 2019-09
New Economics Papers: this item is included in nep-ban and nep-fdg
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