The effect of banking crisis on bank-dependent borrowers

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. Fi...

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Bibliographic Details
Published in:Journal of financial economics 2011, Vol.99 (1), p.116-135
Main Authors: Chava, Sudheer, Purnanandam, Amiyatosh
Format: Article
Language:English
Subjects:
Bank loans
Banking
Banking crisis
Banking crisis Russian default Bank loans Credit crunch
Banking industry
Borrowing
Capital expenditures
Causality
Credit crunch
Debt
Economic crisis
Economic shock
Enterprises
Financial crisis
Financial economics
Impact analysis
Interest rates
Russian default
Russian Federation
Studies
U.S.A
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Summary: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 profitability 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 the financial sector can contribute to the propagation of financial shocks from one economy to another through the banking channel.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2010.08.006