The Effect of Banking Crisis on Bank-Dependent Borrowers

52 Pages Posted: 16 Oct 2005 Last revised: 26 Oct 2015

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 12, 2009

Abstract

We provide causal evidence that adverse capital shocks to banks affect their borrowers' performance negatively. We use an exogenous shock to the U.S. banking system during the Russian crisis of Fall 1998 to separate the effect of borrowers' demand of credit from the supply of credit by the banks. Firms that primarily relied on banks for capital suffered larger valuation losses during this period and subsequently experienced a higher decline in their capital expenditure and growth rates as compared to firms that had access to the public-debt market. Consistent with an adverse shock to the supply of credit, crisis-affected banks decreased the quantity of their lending and increased loan interest rates in the post-crisis period significantly more than the unaffected banks. Our results suggest that the global integration of financial sector can contribute to the propagation of financial shocks from one economy to another through the banking channel.

Keywords: Banking Crisis, Russian Default, Bank loans

JEL Classification: E5, G1, G2, G3

Suggested Citation

Chava, Sudheer and Purnanandam, Amiyatosh K., The Effect of Banking Crisis on Bank-Dependent Borrowers (September 12, 2009). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=821804 or http://dx.doi.org/10.2139/ssrn.821804

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Amiyatosh K. Purnanandam (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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