Sorting Out the Real Effects of Credit Supply

Briana Chang, Matthieu Gomez and Harrison Hong

No 28842, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document that banks which cut lending more during the Great Recession were lending to riskier firms. To explain this evidence, we build a competitive matching model of bank-firm relationships in which risky firms borrow from banks with low holding costs. Based on default probabilities and equilibrium loan rates, we use our sorting model to recover the latent bank holding cost distribution. The measure of banks with low holding costs dropped during the Great Recession. This credit supply shift conservatively accounted for around 50% of the decline in corporate loans over this period. Our attribution cannot be captured by panel regression estimates from the bank lending channel literature.

JEL-codes: G0 G01 G2 G23 (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-ban and nep-fdg
Note: CF ME
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