Cyclicality of Credit Supply: Firm Level Evidence

48 Pages Posted: 18 Mar 2010 Last revised: 15 Feb 2018

See all articles by Victoria Ivashina

Victoria Ivashina

Harvard University; National Bureau of Economic Research (NBER)

Bo Becker

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); ECGI

Multiple version iconThere are 2 versions of this paper

Date Written: August 23, 2011


Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time-series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms’ substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firm’s switching from loans to bonds as a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices and tight monetary policy. The bank-to-bond substitution can only be measured for firms with access to bond markets. However, we show that this substitution behavior has strong predictive power for bank borrowing and investments by small, out-of-sample firms. We consider and reject several alternative explanations of our findings.

Keywords: Banks, Financial Markets and the Macroeconomy, Business Cycles, Credit Cycles

JEL Classification: E32, E44, G21

Suggested Citation

Ivashina, Victoria and Becker, Bo, Cyclicality of Credit Supply: Firm Level Evidence (August 23, 2011). Harvard Business School Finance Working Paper No. 10-107 , AFA 2011 Denver Meetings Paper, Journal of Monetary Economics, Vol. 62 (C), 76-93, 2014, Available at SSRN: or

Victoria Ivashina

Harvard University ( email )

Harvard Business School
Baker Library 233
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Bo Becker (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Dept. of Finance
111 60 Stockholm, 11160

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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