Regulatory Credit Supply Shocks, Reallocation, And Real Economic Outcomes

Aishwarya Bhamidipati, Nishant Kashyap, Vidhya Soundararajan and Prasanna Tantri
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Aishwarya Bhamidipati: University of Virginia
Nishant Kashyap: Indian Institute of Management Ahmedabad
Prasanna Tantri: Indian School of Business

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: We study how regulatory interventions targeting weak banks affect credit allocation and real economic outcomes. Using staggered bank-level exposure to regulatory restrictions and the universe of collateralized corporate loans matched with firm-level financial data, we identify contractions in bank credit supply. We find that affected banks reduce lending disproportionately to high-risk firms, which subsequently experience persistent declines in sales and investment and are largely unable to substitute toward non-bank financing. In contrast, low-risk firms in exposed industries receive relatively more credit and expand investment and employment. These patterns are consistent with a reallocation of credit and productive resources from high-risk to lowrisk firms and are accompanied by modest improvements in industry-level productivity in more exposed sectors.

Keywords: Banking Regulation; Bank Clean-Ups; Bank Enforcement Actions; Creative Destruction; Zombie; Aggregate Productivity (search for similar items in EconPapers)
JEL-codes: E58 G21 G23 G28 (search for similar items in EconPapers)
Date: 2026-02
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Persistent link: https://EconPapers.repec.org/RePEc:ris:cafral:022276

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