Sorting Out the Real Effects of Credit Supply

47 Pages Posted: 9 Apr 2020 Last revised: 22 Dec 2020

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)

Date Written: March 14, 2020

Abstract

We document that banks which cut lending more during the Great Recession lent to riskier firms. To reconcile this evidence, we build a competitive matching model of bank-firm relationships. Riskier firms borrow from banks with lower holding costs or higher abilities to securitize. We use our sorting model to recover bank holding costs based on default probabilities and equilibrium loan rates. Our model attributes 60% of the Great Recession decline in corporate loans to higher bank holding costs or credit supply and 40% to elevated firm risks or credit demand. We interpret reduced-form panel regression estimates of the bank lending channel using our framework.

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 Real Effects of Credit Supply (March 14, 2020). 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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