From Financial to Real Economic Crisis: Evidence from Individual Firm-Bank Relationships in Germany

Freie Universität Berlin, School of Business & Economics Discussion Paper No. 2015/28

56 Pages Posted: 14 Oct 2015

See all articles by Nadja Dwenger

Nadja Dwenger

Max Planck Institute for Tax Law and Public Finance

Frank M. Fossen

University of Nevada, Reno; IZA Institute of Labor Economics

Martin Simmler

University of Oxford - Oxford University Centre for Business Taxation; German Institute for Economic Research (DIW Berlin)

Multiple version iconThere are 2 versions of this paper

Date Written: September 25, 2015

Abstract

What began as a financial crisis in the United States in 2007–2008 quickly evolved into a massive crisis of the global real economy. We investigate the importance of the bank lending and firm borrowing channel in the international transmission of bank distress to the real economy - in particular, to real investment and labor employment by nonfinancial firms. We analyze whether and to what extent firms are able to compensate for the shortage in loan supply by switching banks and by using other types of financing. The analysis is based on a unique matched data set for Germany that contains firm-level financial statements for the 2004-2010 period together with the financial statements of each firm’s relationship bank(s). We use instrumental variable estimations in first differences to eliminate firm- and bank-specific effects. The first stage results show that banks that suffered losses due to proprietary trading activities at the onset of the financial crisis reduced their lending more strongly than non-affected banks. In the second stage, we find that firms whose relationship banks reduce credit supply downsize their real investment and labor employment significantly. This effect is larger for firms that are unable to provide much collateral. We document that firms partially offset reduced credit supply by establishing new bank relationships, using internal funds, and issuing new equity.

Keywords: financial crisis, contagion, credit rationing, relationship lending, investment

JEL Classification: D22; D92; E44; G01; G20; G31; H25; H32

Suggested Citation

Dwenger, Nadja and Fossen, Frank M. and Simmler, Martin, From Financial to Real Economic Crisis: Evidence from Individual Firm-Bank Relationships in Germany (September 25, 2015). Freie Universität Berlin, School of Business & Economics Discussion Paper No. 2015/28, Available at SSRN: https://ssrn.com/abstract=2674164 or http://dx.doi.org/10.2139/ssrn.2674164

Nadja Dwenger

Max Planck Institute for Tax Law and Public Finance ( email )

10117
Germany

HOME PAGE: http://www.tax.mpg.de/en/pub/public_economics/public_economics_people/dwenger_nadja.cfm

Frank M. Fossen (Contact Author)

University of Nevada, Reno ( email )

1664 N. Virginia Street
Reno, NV 89557-0030
United States

HOME PAGE: http://business.unr.edu/faculty/ffossen/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=2906

Martin Simmler

University of Oxford - Oxford University Centre for Business Taxation ( email )

Saïd Business School
Park End Street
Oxford, OX1 1HP
United Kingdom

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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