Sorting Out the Real Effects of Credit Supply

37 Pages Posted: 9 Apr 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 the most during the Great Recession were lending to the riskiest firms. Motivated by this evidence, we build a competitive matching model of bank-firm relationship, in which firms with riskier projects borrow from the banks with lower holding costs (e.g. higher ability to securitize). A firm's ability to borrow depends on the entire distribution of bank holding cost. We derive and estimate a simple measure of this distribution using loan rate and credit ratings data. We conclude that its upward shift during the Great Recession, i.e. credit supply effect, explains the decline in aggregate firm loans as opposed to an increase in firm riskiness.

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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