Credit Supply During a Sovereign Debt Crisis

59 Pages Posted: 3 May 2013

Date Written: April 24, 2013

Abstract

We study the effect of the increase in Italian sovereign debt risk on credit supply on a sample of 670,000 bank-firm relationships between December 2010 and December 2011, drawn from the Italian Central Credit Register. To identify a causal link, we exploit the lower impact of sovereign risk on foreign banks operating in Italy than on domestic banks. We study firms borrowing from at least two banks and include firm x period fixed effects in all regressions to controlling for unobserved firm heterogeneity. We find that Italian banks tightened credit supply: the lending of Italian banks grew by about 3 percentage points less than that of foreign banks, and their interest rates were 15-20 basis points higher, after the outbreak of the sovereign debt crisis. We test robustness by splitting foreign banks into branches and subsidiaries, and then examine whether selected bank characteristics may have amplified or mitigated the impact. We also study the extensive margin of credit, analyzing banks' propensity to terminate existing relationships and to grant new loan applications. Finally, we test whether firms were able to compensate for the reduction of credit from Italian banks by borrowing more from foreign banks. We find that this was not the case, so that the sovereign crisis had an aggregate impact on credit supply.

Keywords: credit supply, sovereign debt crisis, bank lending channel

JEL Classification: G21, F34, E44, E51

Suggested Citation

Bofondi, Marcello and Carpinelli, Luisa and Sette, Enrico, Credit Supply During a Sovereign Debt Crisis (April 24, 2013). Bank of Italy Temi di Discussione (Working Paper) No. 909. Available at SSRN: https://ssrn.com/abstract=2259657 or http://dx.doi.org/10.2139/ssrn.2259657

Marcello Bofondi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Luisa Carpinelli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Enrico Sette

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
344
Abstract Views
1,431
rank
90,216
PlumX Metrics