Sorting Out the Real Effects of Credit Supply
47 Pages Posted: 9 Apr 2020 Last revised: 22 Dec 2020
Date Written: March 14, 2020
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: Suggested Citation