Sorting Out the Effect of Credit Supply

57 Pages Posted: 9 Apr 2020 Last revised: 6 Oct 2023

See all articles by Briana Chang

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Matthieu Gomez

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: June 30, 2023

Abstract

We document that banks that cut lending more during the Great Recession were lending to
riskier firms ex-ante. To understand the aggregate implications of this sorting pattern, we
build an assignment model in which banks have heterogeneous costs to take on risky loans and
firms have different credit risks. In the model, aggregate loan volume depends on the entire
distribution of bank holding costs and firm credit risks. We then use our model to recover the
change in the distribution of bank holding costs during the Great Recession and quantify its
effect on aggregate loan volume.

Keywords: Credit supply, Financial Crises, Matching Model, Credit Risk

JEL Classification: G01, G21, G2, G23

Suggested Citation

Chang, Briana and Gomez, Matthieu and Hong, Harrison G., Sorting Out the Effect of Credit Supply (June 30, 2023). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3554463 or http://dx.doi.org/10.2139/ssrn.3554463

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States

Matthieu Gomez

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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