The real effects of banks' corporate credit supply: A literature review (original) (raw)

Abstract

In this paper, we review the rapidly growing literature on the real effects of banks’corporate credit supply. We cover recent methodological advances and provide anin-depth survey of the existing evidence. The literature consistently shows that creditsupply contractions lead to adverse real outcomes, but economic magnitudes vary acrosssamples and identification strategies. This variation has become smaller in more recentwork, using highly granular data. We further document heterogeneity in firm outcomesand show that the evidence is more ambiguous for expansionary shocks. Our analysisallows us to identify current knowledge gaps and worthwhile avenues for future research.

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References (166)

  1. The reason why we do not present Equation (1) as a panel-data model is because the majority of the empirical literature uses two periods (i.e., a before-and-after), and then takes first-differences of the data.
  2. The selection could also occur in the opposite direction. In the study of Khwaja and Mian (2008), for example, more affected banks tend to be selected by better performing firms, which in turn leads to a negative correlation between credit supply and credit demand. Sec- tion 4.1.1 explains the study of Khwaja and Mian (2008) in more detail.
  3. 9 Note that our aim here is to provide an overview of methodologies used to estimate how banks transmit shocks to their borrowers. The papers presented in Section 4.1 therefore do not necessarily consider real effects. Afterwards, we illustrate how these identification strate- gies are used to estimate the real effects of bank lending shocks.
  4. The cross-guarantee provisions that were exercised by the Federal Deposit Insurance Corporation led to the failure of healthy bank subsid- iaries between 1988 and 1992, when the unhealthy parent of these subsidiaries failed. Thus, the failure of those subsidiaries was indepen- dent of local economic factors and did not affect demand.
  5. In 1992, the Pakistani government introduced dollar deposit accounts, which had become very popular and accounted for 43.5% of total deposits by 1998. Banks, however, were not actually permitted to hold dollars themselves, and had to exchange them for rupees at the cen- tral bank. When depositors claimed their dollars back in response to the nuclear tests, banks were only able to withdraw them from the central bank at the initial exchange rate. With the International Monetary Fund no longer supporting the exchange rate as an economic sanction after the tests, exchange rate risk materialized and caused a shock to bank liquidity (Khwaja & Mian, 2008).
  6. In fact, Gan (2007) employs the two-stage model of Heckman (1979) to address the potential survivorship bias because 35% of the bank- firm relationships in her sample did not survive after the Japanese land market crash. In the first stage, she estimates a probit regression on whether the lending relationship survived. Then, the second stage estimates the loan growth regression demonstrated in Equation (2).
  7. In a panel data set, firm-time fixed effects need to be used. As Gan (2007) and Khwaja and Mian (2008) collapse their data into single pre- and post-periods and then take the first difference of the committed credit, their regression sample is only cross-sectional. Hence, they use firm fixed effects instead of firm-time fixed effects in their main regressions.
  8. The right hand side of Equation 3 can also include bank-firm fixed effects to control for endogenous bank-firm relationships, as in Jiménez et al. (2017). Amiti and Weinstein (2018) formally demonstrate that as long as regressions in their model are estimated based on the same numeraire, the exclusion of bank-firm fixed effects does not affect the consistency of the estimates of bank and firm shocks.
  9. In fact, some other papers compare firms in similar clusters (e.g., Acharya et al., 2018; Berton et al., 2018; Edgerton, 2012; Ferrando et al., 2019; Morais et al., 2019). However, those studies do not examine the validity of their approaches as detailed as Degryse et al. (2019).
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