Intermediated Credit and Local Resilience

Posted: 5 Oct 2020

See all articles by Erica Xuewei Jiang

Erica Xuewei Jiang

University of Southern California - Marshall School of Business

Will Shuo Liu

City University of Hong Kong - Department of Economics and Finance

Lee Seltzer

University of Texas at Austin - Department of Finance

Date Written: September 15, 2020

Abstract

This paper demonstrates the importance of bank capital in improving local resilience and the complementarity of bank capital and government aid programs. We show that following the COVID-19 pandemic and shutdown, areas with more jobs supported by subsidized bank loans during normal times had more job losses and business closures, and more so if the local banking sector is less capitalized. Such losses were heavily borne by low-income workers. We also find that areas with a less capitalized banking sector received disproportionately less Paycheck Protection Program funding. Using a dynamic model of firm entry and exit with bank borrowing, we formulate the mechanism of how bank capital can mitigate the impact of adverse aggregate shocks on employment and firm exit. We calibrate the model to quantify effects of bank capital on resilience and the amount of government funding necessary for full resilience in various simulated scenarios of adverse shocks and bank capitalization.

Keywords: Banks, Small Businesses, Local Economy, Paycheck Protection Program, COVID-19

JEL Classification: E3, E2, G2

Suggested Citation

Jiang, Erica Xuewei and Liu, Will Shuo and Seltzer, Lee, Intermediated Credit and Local Resilience (September 15, 2020). Available at SSRN: https://ssrn.com/abstract=3693350 or http://dx.doi.org/10.2139/ssrn.3693350

Erica Xuewei Jiang (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Will Shuo Liu

City University of Hong Kong - Department of Economics and Finance ( email )

9-206 Lau Ming Wai Academic Bldg
83 Tat Chee Ave, Kowloon Tong
Kowloon, 00000
Hong Kong

Lee Seltzer

University of Texas at Austin - Department of Finance ( email )

TX
United States

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