Sorting Out the Real Effects of Credit Supply

48 Pages Posted: 9 Apr 2020 Last revised: 25 Feb 2022

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: February 24, 2022

Abstract

We show that banks that cut lending more during the Great Recession lent to riskier firms. To examine the equilibrium effect of this sorting pattern, we build an assignment model in which banks have heterogeneous holding costs and firms have heterogeneous risks. In the model, loan volume declines more when negative credit supply shocks are concentrated on low holding cost banks like Lehman Brothers relative to high holding cost banks. 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 Real Effects of Credit Supply (February 24, 2022). 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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