The Banks that Said No: Banking Relationships, Credit Supply and Productivity in the United Kingdom

55 Pages Posted: 14 Oct 2015 Last revised: 17 Oct 2015

See all articles by Jeremy Franklin

Jeremy Franklin

Bank of England

May Rostom

Bank of England

Gregory Thwaites

Bank of England - Monetary Analysis

Date Written: October 9, 2015

Abstract

This paper uses a large firm-level data set of UK companies and information on their pre-crisis lending relationships to identify the causal links from changes in credit supply to the real economy following the 2008 financial crisis. Controlling for demand in the product market, we find that the contraction in credit supply reduced labour productivity, wages and the capital intensity of production at the firm level. Firms experiencing adverse credit shocks were also more likely to fail, other things equal. We find that these effects are robust, statistically significant and economically large, but only when instruments based on pre-crisis banking relationships are used. We show that banking relationships were conditionally randomly assigned and were strong predictors of credit supply, such that any bias in our estimates is likely to be small.

Keywords: Credit shock, financial frictions, productivity puzzle, firm-level data

JEL Classification: D21, D22, D24, G21

Suggested Citation

Franklin, Jeremy and Rostom, May and Thwaites, Gregory, The Banks that Said No: Banking Relationships, Credit Supply and Productivity in the United Kingdom (October 9, 2015). Bank of England Working Paper No. 557, Available at SSRN: https://ssrn.com/abstract=2674060 or http://dx.doi.org/10.2139/ssrn.2674060

Jeremy Franklin (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

May Rostom

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Gregory Thwaites

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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