The Effect of Banking Crisis on Bank-Dependent Borrowers

FDIC Working Paper No. 2010-09

55 Pages Posted: 9 Jan 2012

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 12, 2010

Abstract

We provide causal evidence that adverse capital shocks to banks affect their borrowers' performance negatively. We use an exogenous shock to the U.S. banking system during the Russian crisis of Fall 1998 to separate the effect of borrowers' demand of credit from the supply of credit by the banks. Firms that primarily relied on banks for capital suffered larger valuation losses during this period and subsequently experienced a higher decline in their capital expenditure and profitability as compared to firms that had access to the public-debt market. Consistent with an adverse shock to the supply of credit, crisis-affected banks decreased the quantity of their lending and increased loan interest rates in the post-crisis period significantly more than the unaffected banks. Our results suggest that the global integration of the financial sector can contribute to the propagation of financial shocks from one economy to another through the banking channel.

Keywords: Banking Crisis, Russian Default, Bank Loans, Credit Crunch

JEL Classification: G21, G32, D82

Suggested Citation

Chava, Sudheer and Purnanandam, Amiyatosh, The Effect of Banking Crisis on Bank-Dependent Borrowers (May 12, 2010). FDIC Working Paper No. 2010-09. Available at SSRN: https://ssrn.com/abstract=1982118 or http://dx.doi.org/10.2139/ssrn.1982118

Sudheer Chava (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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