Identifying Credit Supply Shocks with Bank-Firm Data: Methods and Applications

Abstract

Current empirical methods to identify and assess the impact of bank shocks rely strictly on firms borrowing from multiple banks and ignore the many firms borrowing from only one bank. Yet, such single-relationship firms may be the most prone and sensitive to bank-loan supply shocks. Therefore, we develop time-varying cross-sectional measures of bank-loan supply that include these single-relationship firms. Using bank-firm matched credit data from Belgium for the period 2002-2012, we examine their information content and impact on firm outcomes and bank risk-taking. Our estimated supply shocks correlate significantly with interbank liabilities growth and bank lending standards. Firms borrowing from banks with negative supply shocks exhibit lower growth, investment and sales. Positive supply shocks are associated with bank risk-taking behaviour at the extensive margin. Importantly, in order to capture these effects in our sample, it is crucial to include the single-relationship firms in the identification of the supply shocks.

Keywords: credit supply identification, bank lending, corporate investments, bank risk-taking

JEL Classification: G21, G32