Credit Supply, Flight to Quality and Evergreening: An Analysis of Bank-Firm Relationships after Lehman

59 Pages Posted: 3 Sep 2010

Date Written: April 26, 2010

Abstract

This paper analyzes the effects of the financial crisis on credit supply by using highly detailed data on bank-firm relationships in Italy after Lehman’s collapse. We control for firms’ unobservable characteristics, such as credit demand and borrowers’ risk, by exploiting multiple lending. We find evidence of a contraction of credit supply, associated to low bank capitalization and scarce liquidity. The ability of borrowers to compensate through substitution across banks appears to have been limited. We also document that larger less-capitalized banks reallocated loans away from riskier firms, contributing to credit pro-cyclicality. Such ‘flight to quality’ has not occurred for smaller less-capitalized banks. We argue that this may have reflected, among other things, evergreening practices. We provide corroborating evidence based on data on borrowers' productivity and interest rates at bank-firm level.

Keywords: credit supply, bank capital, flight to quality, evergreening

JEL Classification: E44, E51, G21, G34, L16

Suggested Citation

Albertazzi, Ugo and Marchetti, Domenico Junior, Credit Supply, Flight to Quality and Evergreening: An Analysis of Bank-Firm Relationships after Lehman (April 26, 2010). Bank of Italy Temi di Discussione (Working Paper) No. 756. Available at SSRN: https://ssrn.com/abstract=1670563 or http://dx.doi.org/10.2139/ssrn.1670563

Ugo Albertazzi

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Domenico Junior Marchetti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+39 6 4792 2256 (Phone)
+39 6 4792 3720 (Fax)

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