(Unobserved) Heterogeneity in the bank lending channel: Accounting for bank-firm interactions and specialization

40 Pages Posted: 17 Nov 2023

See all articles by Alonso Villacorta

Alonso Villacorta

University of California, Santa Cruz - Department of Economics

Lucciano Villacorta

Central Bank of Chile

Bryan Gutierrez

University of Minnesota - Minneapolis - Department of Finance

Date Written: May 15, 2023

Abstract

The bank lending channel is heterogeneous across firms. Using matched bank-firm credit data, we develop a framework that estimates the effects of firm-demand and bank-supply credit shocks, allowing for interactions between bank and firm unobserved factors. Bank shocks can have heterogeneous effects across firm types, where firm type is unobserved for the econometrician. We decompose credit growth dynamics into time-varying firm and bank-firm type interaction effects. We uncover significant heterogeneity in the bank lending channel: i) The effect of bank shocks varies considerably across the identified firm types, ii) During the Great Recession, more exposed banks severely contracted their loan supply to some firms but shielded others, iii) We uncover a bank-firm matching channel: the transmission of shocks crucially depends on the bank-firm network, with credit growth dropping by up to 20% in a counterfactual randomly matched network, iii) Accounting for interactions helps to more precisely estimate the impact of bank shocks on firm real outcomes.

Keywords: Bank lending channel, credit supply identification, unobserved heterogeneity, grouped-fixed effects

JEL Classification: C23, E22, E51, G21

Suggested Citation

Villacorta, Luis Alonso and Villacorta, Lucciano and Gutierrez, Bryan, (Unobserved) Heterogeneity in the bank lending channel: Accounting for bank-firm interactions and specialization (May 15, 2023). Available at SSRN: https://ssrn.com/abstract=4608656 or http://dx.doi.org/10.2139/ssrn.4608656

Luis Alonso Villacorta (Contact Author)

University of California, Santa Cruz - Department of Economics ( email )

Santa Cruz, CA 95064
United States

HOME PAGE: http://https://sites.google.com/site/alonsovillacorta/

Lucciano Villacorta

Central Bank of Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

Bryan Gutierrez

University of Minnesota - Minneapolis - Department of Finance ( email )

United States

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